How US-China tensions are pushing US-listed Chinese tech firms to Hong Kong

Growing geopolitical rivalry, increasing US investor suspicion of Chinese firms and a more attractive HKEX following years of reforms are feeding a growing trend of ‘repatriation’
Expect not just more secondary listings in Hong Kong, but also US delistings and Hong Kong relistings

Kenneth Lee

Published: 9:45am, 1 Sep, 2020

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The recent filing by Ant Group, the financial affiliate of Alibaba, to list its shares in Hong Kong and on Shanghai’s Star Market, China’s Nasdaq-like tech board, comes after a study highlighted 31 US-listed Chinese companies that could flock to the Hong Kong bourse. This has been a long time coming, with the fallout from several US-listed Chinese companies, most notably those exposed by Muddy Waters early last decade.

Alibaba’s secondary listing in Hong Kong last year essentially set off a repatriation trend. [Alibaba, which owns 33 per cent of Ant, is the owner of the South China Morning Post]. In June, we saw two Chinese technology giants, NetEase and JD.com, choose Hong Kong for their secondary listings, raising some US$6.7 billion. In the short to medium term, more secondary listings – or US delistings and Hong Kong relistings – can be expected.

This is something that Hong Kong Exchanges and Clearing (HKEX) and the Hong Kong government are very keen to realise, after the recent market reforms with a strong emphasis on leading sectors such as technology, biotech and life sciences. We have also seen the introduction of weighted voting rights structures or dual-class shares, a critical determinant of the listing jurisdiction for these sectors.

In light of the US-China situation, expect more, if not accelerated, repatriation activities over the next one to two years. Many factors affect where companies choose to float their shares, and a key consideration, particularly for the initial public offering, is pricing/valuation, of which the interest of the general investing public is vital.

For the past few decades, the US market has dominated the listing of technology stocks, with its exceptionally diverse base of investors and investment managers, many of whom have a significant interest in this sector, resulting in higher multiples (measures of a company’s financial well-being) and greater liquidity.

However, investor interest in the United States – and the resulting effect on share prices – has been declining for Chinese issuers, especially those with very little or no operations outside mainland China. Nasdaq-listed Luckin Coffee’s accounting fraud undoubtedly reminded US investors of the Chinese accounting scandals of the past decade, and the risk of investing in small and relatively unknown Chinese enterprises.

However, some would argue that the biggest factor driving the return of US-listed Chinese companies to the Hong Kong market is probably geopolitics.

This is especially so after President Donald Trump renewed comments on tighter control over US-listed Chinese companies, and the introduction of the Holding Foreign Companies Accountable Act, which gives US authorities greater powers to access potentially sensitive information of US-listed foreign companies, and to delist them.

This is exceptionally concerning given the abrupt shutdown of consulates in Houston and Chengdu, a worsening US economy and the continued spread of Covid-19.

Rising tensions between the two nations has undoubtedly influenced the decisions of Chinese issuers leaving or seeking a secondary Hong Kong listing. It is a market much closer to home, where investors and regulators have a much broader and commercial understanding of the mainland Chinese market.

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The collaboration and increasing connections between the Hong Kong and mainland capital markets adds to the attractiveness of returning to the Hong Kong bourse. It also provides greater access to mainland Chinese institutional and retail investors, who have some equity participation opportunities in many of these industry-leading Chinese companies.

Hong Kong has always been a leading choice for Chinese enterprises seeking an IPO, mainly due to the significant international investor interest the HKEX can attract, given limited foreign investor access to the mainland market. However, it is the HKEX’s many critical reforms that have provided a strong impetus for many leading Chinese technology companies listed in the US to return (or at least partially) to Hong Kong.

When many of these technology companies launched their IPOs, Hong Kong was fundamentally not ready, most notably in the area of the weighted voting rights and dual-class share structures – common features with technology companies but only recently introduced with Xiaomi as the first listed company leveraging them.

Now, given the geopolitical tensions, industry participants generally expect to see more returnees over the next 18-24 months.

Meanwhile, the process involved in a secondary listing is not much more complicated or overwhelming than Chinese issuers endured the first time. These issuers, and their management, already have considerable familiarity with the IPO process, and will be better prepared for the public disclosure demands.

America’s loss may be Hong Kong’s gain for company listings

Another plus for Chinese companies moving closer to home is that compliance and maintenance is, in general, stricter for listings in the US compared to Hong Kong. Although those seeking a secondary listing still need to abide by US rules, this is a nominal cost, considering the potentially substantial proceeds that can be raised.

In the near term, this is probably the limit as far as “moving back” to Asia is concerned for US-listed Chinese companies. It will be interesting to see, longer term, a trend of companies returning to the mainland and A-share market. This is likely to be just a matter of time, and we have already seen some cases – not necessarily from the US, but from other markets including Hong Kong.

In recent years, many start-ups have abandoned their offshore structures and plans to list in foreign markets, too. Until there are more market reforms on the mainland, Hong Kong, in the near and medium term, will continue to benefit from this “Go East” trend.

Kenneth Lee is head of global entity management services at TMF Hong Kong

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