Embattled U.S.-listed Chinese Firms Find Safer Harbor in Hong Kong

Second listings in Hong Kong help U.S.-listed Chinese companies diversify political risk as rivalry between Beijing and Washington grows

Key takeaways:

  • A second listing in Hong Kong can help U.S.-listed Chinese companies increase trading volumes and stabilize prices
  • A more diverse investor pool can help companies recoup lost value from recent U.S. selloffs

By Fai Pui

Nov. 26, 2019 will go down as a landmark day for the Hong Kong Stock Exchange, drawing droves of reporters from the world’s leading financial news outlets to watch history unfold.

A who’s-who of top officials, including the city’s former Chief Executive Tung Chee-hwa, Financial Secretary Paul Chan, and stock exchange chairwoman Shih May-lung, gathered in front of the iconic opening bell, alongside guest of honor Daniel Zhang, chairman of e-commerce giant Alibaba Group Holding Ltd. (9988.HK; BABA.U.S.). With a strike of the bell, Alibaba went public on the city’s bourse, opening the gates for a steady stream of U.S.-listed Chinese followers to make similar second listings.

The watershed moment marked a reversal of tide for Chinese companies, which began listing in the U.S. in the late 1990s, helping to boost their home country’s position in international capital markets. But those same companies’ shares have suffered big losses in recent years as U.S.-China tensions heated up. At their current levels many look highly undervalued.

But the big difference in time zones – New York is typically 12 to 13 hours behind China – limit late-night trading of those stocks by large China-based investors. Strict capital controls by China also make it difficult for Chinese funds to invest in these companies. That’s left many such companies with no other choice but to consider coming back to China in pursuit of better valuations.

The tide of U.S.-listed Chinese company homecomings actually dates back as early as five years ago. Starting around that time companies like Qihoo 360 (601360.SH), Focus Media (002027.SH) and Giant Network Group (002558.SZ), abandoned their U.S. listings by privatizing and returned to domestic A-share markets in Shanghai and Shenzhen in pursuit of higher valuations.

But the cost of privatization is high and doesn’t always succeed. What’s more, relisting often takes longer than making simpler first-time listings. Alibaba provided a new template for the homecoming trend by offering second listings in Hong Kong through swaps of American depositary shares (ADS) that were already traded in New York. That allowed for near 24/7 trading of companies’ shares, boosting their volume while stabilizing prices and highlighting the companies’ real value in a market much closer to their home.

Bigger Trading Volumes

As of Dec. 11, 18 U.S.-listed Chinese companies had made second listings in Hong Kong following Alibaba’s landmark flotation. An analysis of the group from the past three months shows the variance in stock volatility between the two markets is just 1 to 4 percentage points.

For example, Alibaba’s shares over the last three months fell by 27.8% in Hong Kong and 25.6% in the U.S., while NetEase, Inc (9999.HK ; NTES.US) rose by 17.9% and 16.3% in Hong Kong and the U.S. over that time, respectively. In a similar pattern, Trip.com (9961.HK ; TCOM.US) dropped by 15.9% in Hong Kong over that time and 18% in the U.S.

Second listings may also provide more pricing stability, judging from the performance over the past month of four e-commerce companies: Alibaba, JD.com (9618.HK; JD.US), Baozun (9991.HK; BZUN.US) and Pinduoduo (PDD.US). Shares of Pinduoduo, the only one of the four without a second listing, fell by 29% over the past month. By comparison, the other three saw milder changes, including a 23.7% drop in Alibaba’s U.S. stock, and increases of 2.5% and 14.7% for JD and Baozun, respectively.

We can also compare dual-listed electric car maker Xpeng Motors (9868.HK ; XPEV.US) with rival Nio Inc. (NIO.U.S.) which is only listed in the U.S. Xpeng registered a 5.6% rise in the past month, while Nio fell 11%.

Such analyses, while brief, appear to show that U.S.-listed Chinese stocks with second listings in Hong Kong perform better than peers that are only U.S.-listed. That’s probably because the second listing makes it more convenient for investors and funds in Hong Kong and other Asian markets to trade these stocks, helping to increase volumes, which can stabilize prices.

A good example is JD.com, which went public in Hong Kong on June 18 last year. Since then, its average daily volumes have been around 11.5 million shares in the U.S. and 5.39 million in Hong Kong. That compared with an average daily volume of 13.92 million shares in the year before the dual listing, showing the company has recorded a notable increase for the two markets combined. The lower volume in the U.S. may also show that some investors have switched their trading to Hong Kong.

Other companies are showing a similar trend. In the year before its Hong Kong dual listing on June 12 last year, NetEase’s average daily volume was just 1.94 million shares. But since then, its U.S. daily volume has risen to 2.92 million shares and its Hong Kong stock has reached a striking 5.21 million.

Internet search giant Baidu (BIDU.US; 9888.HK) has enjoyed a Hong Kong average daily volume of nearly 4 million shares and a U.S. volume of 6.4 million since its second listing, which is far higher than its earlier average of 5.83 million shares in just the U.S. All three examples show how dual listings are helping companies attract more investors, while also boosting their stocks’ liquidity.

Recovering Valuations

Many world-class companies have emerged in China over the last 30 years, but the market has also produced a few black sheep. One of those was coffee chain Luckin, whose accounting scandal last year hammered shares of many U.S.-listed Chinese companies over concerns that some might be engaged in similar fraud.

But second listings in Hong Kong have helped companies boost their trading volumes and increase diversity of their investor pools, helping their valuations to gradually normalize and more fully reflect investor views and expectations on both sides of the Pacific.

As competition between China and the U.S. heats up, the U.S. securities regulator has begun implementing the “Holding Foreign Companies Accountable Act,” which can force a company to delist if its auditor refuses to submit work papers to the U.S. regulator for three consecutive years. The act also prohibits U.S. listings for any company that fails to report if it is owned or controlled by foreign governments.

In the most extreme cases, the U.S. regulator could kick companies that violate those rules off American stock exchanges.

Meantime, China’s own data security law is also making U.S.-listed Chinese tech companies feel compelled to seek alternatives. Some of those, especially big-data-related tech firms, have been eager to find other markets for listings since ride hailing giant Didi Global (DIDI.US) said it plans to delist from the New York Stock Exchange. Such companies are exploring markets where their shares can continue trading if they are forced from the U.S., with Hong Kong emerging as one of the best options.

Second listings in Hong Kong seem to answer many of these companies’ needs. If they get booted from the U.S., they can have their U.S. shares converted into Hong Kong shares and continue trading with lower legal risks and less expense related to privatization.

Companies previously sought second listings mainly to increase their trading volumes and boost valuations. But policy risks have now become equally important. In the broader picture of growing China-U.S. competition, it’s impossible to know who will become the next Didi. When tensions flare, a second Hong Kong listing might just make the difference between life and death for some of these companies.

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