Hong Kong to benefit from Beijing’s Didi crackdown, IPO rules overhaul, analysts say

The crackdown on Didi sends a strong signal that Beijing does not want to see Chinese IPOs listing in the US: analyst
‘If we had to speculate, it would probably be easier for these companies to list in Hong Kong than in the US,’ partner at American law firm says

Banking & finance

Enoch YiuandGeorgina Lee

Published: 7:00am, 13 Jul 2021

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Hong Kong is likely to benefit as China discourages technology companies from listing in the United States, according to deal makers and analysts.

Many of mainland China’s high-flying technology companies have opted for initial public offerings (IPOs) in the US, as it has the deepest and most liquid market globally. The US bourses’ listing rules are also more relaxed than those in Hong Kong. The tide, however, maybe turning, with the likes of LinkDoc Technology putting their US listing plans on hold.

Their decision follows a review of ride-hailing company Didi Chuxing’s data collection policies by the Cyberspace Administration of China (CAC), the mainland internet regulator, on national security grounds. The review was announced just days after Didi’s US$4.4 billion IPO at the New York Stock Exchange on June 30.

The crackdown on Didi “clearly sends a strong signal that Beijing does not want to see Chinese IPOs listing in the US”, said Ramiz Chelat, portfolio manager at Vontobel Asset Management, which is part of Swiss private bank and investment company Vontobel Holding. “Hence, we believe that any listings in the pipeline that were planning to head to the US will have to rethink strategy and instead focus on a primary listing in Hong Kong. This is all part of [China’s] ‘coming home’ strategy,” he added.

Last Tuesday, China’s State Council announced a sweeping overhaul of regulations that govern how companies raise money both at home and overseas, with the country’s technology sector firmly in its cross hairs. The overhaul and the crackdown on Didi suggest Beijing is no longer taking a relaxed approach to Chinese technology companies with a lot of consumer data listing in the US.

The Didi Chuxing headquarters in Beijing. Photo: Reuters

And while the details are still unavailable, the application of the overhauled regulations was likely to differentiate between Hong Kong and the US, according to Vivian Yiu, partner at US law firm Morrison & Foerster in Hong Kong. “If we had to speculate, it would probably be easier for these companies to list in Hong Kong than in the US,” she said.

US investment bank Morgan Stanley too believes that the overhaul will lead to more listings in Hong Kong. This could explain why the shares of bourse operator Hong Kong Exchanges and Clearing (HKEX), which closed at HK$504.5 on Monday, have risen 9 per cent this month, even as the Hang Seng Index has dropped 5 per cent.

“While Beijing would continue to allow companies in less sensitive sectors to get listed offshore, it would encourage sensitive sectors (particularly data rich tech firms) to go for listing onshore and in the Hong Kong market instead,” Robin Xing, chief China economist at Morgan Stanley Asia, said in a research note last week.

The Hong Kong IPO market was vibrant even prior to the news, with total funds raised in the first half increasing 127 per cent year on year

Kenneth Ho Shiu-pong, equity market managing director, Haitong International Securities Company

The city has been a fundraising hub for Chinese companies for three decades now. Since the first H shares – Tsingtao Brewery’s – listed in Hong Kong in July 1993, more than 1,300 mainland companies have listed in Hong Kong. They represent 80 per cent of the total market capitalisation.

But the US has been catching up in recent years, as technology companies get better valuations there. In the first half of this year, 34 Chinese companies together raised US$12.5 billion in the US, the most such companies have in the corresponding period in more than a decade, according to financial data provider Refinitiv. They also raised more than the US$10 billion recorded by the Shenzhen Stock Exchange in the same period. Shanghai and Hong Kong, however, reported bigger amounts being raised in this period, at US$20.5 billion and US$28.6 billion, respectively.

Beijing is concerned about domestic companies listing in the US, given its ongoing tussle with Washington over technology and US threats to delist Chinese companies over accounting rules, Jefferies analysts Edison Lee and Chi Tsai said in a research report last week. China would like to see its technology companies rely less on the US capital market and boost the stock markets of Hong Kong and the mainland, they said.

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HKEX carried out a listing reform in April 2018 to allow new economy companies with multiple classes of voting rights and pre-revenue biotechnology firms to list in the city. It also made it easier for US-listed Chinese technology giants to conduct secondary listings or dual primary listings in Hong Kong.

The reform attracted 146 new economy companies to Hong Kong in the three years to the end of March this year. These companies raised a total of HK$682.2 billion (US$87.8 billion) or 61 per cent of all IPOs during this period.

The reform also paved the way for secondary listings by 13 US-listed Chinese technology giants, including Alibaba Group Holding, which owns this newspaper. Last week, electric vehicle (EV) maker Xpeng became the first weighted voting rights company to have a dual primary listing in the US and Hong Kong.

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The city’s regulatory regime is ready to serve mainland technology companies that cannot list in the US because of Beijing’s overhaul of listing rules, said Clement Chan, the managing director of accounting firm BDO. “All these companies were likely to look at the Hong Kong market as a close substitute to the US market, in terms of liquidity and hard currency raising,” he said.

In the near term, the US market may also seem less attractive following the Didi review, as this investigation might dampen the valuations that Chinese companies might seek from US investors, said Jeffrey Sun, a partner at law firm Orrick based in Shanghai. Sun specialises in helping Chinese companies raise funds in the US.

“But over the longer term, the majority of applicants that hope to seek a US listing will continue to press on with their plans. Certain sectors, such as EV makers, could get a higher valuation by seeking a US listing first, than in Hong Kong,” he said.

Many technology firms will delay their listing timetables, as China’s new regulations will probably require all IPO candidates to revisit their business models and data governance, said Edward Au, Deloitte China’s southern region managing partner. “However, in the long run, this is expected to uplift corporate governance and bring benefits to the sustainable growth and development of the new economy business, ” he said.

The interest in listing in Hong Kong among Chinese technology companies, and the city’s pipeline of technology and health care deals for the coming months are both strong, said Kenneth Ho Shiu-pong, the equity market managing director at Haitong International Securities Company, one of the largest IPO underwriters in Hong Kong.

“The Hong Kong IPO market was vibrant even prior to the news, with total funds raised in the first half increasing 127 per cent year on year. We believe this growth will continue – more technology companies may consider listing in Hong Kong instead of the US,” he said.