Why US-Listed Chinese Companies Are Fleeing for Hong Kong
by Jonathan M. Hayashi
Chinese Companies Relisting on HKEX
Alibaba relisted in Hong Kong in November 2019 and raised $12.9 billion. Internet conglomerate NetEase, EC giant JD.com, and education group New Oriental followed in its footsteps in 2020 to also carry out a secondary listing on HKEX, each snapping $1 billion to $3 billion from the market. Online travel agent Ctrip, video platform Bilibili, and search engine Baidu joined the club recently in 2021, each banking about $1 billion to $3 billion. A number of Chinese companies such as music streaming platform Tencent Music, online discount retailer Vipshop, live streaming platform JOYY Group, and Bytedance are reportedly seeking a secondary listing in Hong Kong as well.
On the other side of the world, after several U-turns, the New York Stock Exchange officially delisted the ADRs of three Chinese telecom companies including China Mobile, China Telecom, and China Unicom Hong Kong in early 2021, following an executive order by then-president Donald Trump that barred US investors from holding stakes in groups suspected of having ties to China’s military. Recently, Chinese state-owned oil giant China National Offshore Oil Corp was pushed out of NYSE on Biden’s watch, becoming the latest stock market “refugee.”
The US Push and the HK Pull
In May 2020, the US Senate unanimously passed the “Holding Foreign Companies Accountable Act,” that laid out stricter regulatory requirements in auditing and providing proof of government ownership in the wake of the Luckin Coffee fraud scandal. This bill was quite challenging to US-listed Chinese companies, and has affected the stock prices of Chinese giants like Alibaba, Baidu, and JD. The increased regulations against these companies caused their stock prices to fall by six to 10 percent as they could be forcefully delisted if the necessary requirements are not met. On December 2, 2020, this bill was formally passed by the U.S. House of Representatives, and soon after signed into law by former president Trump.
In January 2021, during Trump’s last days in office, the US government included nine Chinese companies on the blacklist for relation to the Chinese military, including world’s third largest smartphone maker Xiaomi. Such a list was first introduced by Trump in November 2020, requiring American investors to sell their shares in “blacklisted” companies before November 11 2021. Since then, the US government has continued to add more Chinese companies to the list, companies that now need alternative plans in the unanticipated circumstance of being placed on the US government’s “blacklist.”
On April 30th 2018, the Hong Kong Stock Exchange announced a new listing regulation that came into effect on on May 1st, 2018, which mainly introduced two regulation loosenings: firstly, biotech companies do not have to make operating revenue in order to be listed; secondly, weighted voting rights (WVR) were allowed, meaning certain persons could be given voting power disproportionate to their shareholdings, which is similar to the dual-class structure that Google, Facebook, Atlassian, Roku adopt.
These changes in regulation are a breeze of tailwind that wouldn’t be enough to attract the secondary listings if not for the great environment that Hong Kong Stock Market provides. HKEX is the fifth largest stock exchange in the world. NYSE and NASDAQ are the largest two, with Japan Exchange Group and Shanghai Stock Exchange (SSE) placing third and fourth. HKEX has a competitive language advantage compared to Japan’s market where the language barrier is high due to not only the Japanese documents required, but also the communication with Japanese investment banks. Not to mention it is difficult for investors in Japan’s market to properly evaluate the Chinese companies due to limited understanding of the business landscape in China.
On the other hand, when companies compare HKEX with SSE, they face a more conservative listing standard, such as a requirement of generating positive net profit and net cash flow for more than three years ahead of listing. Additionally, there is no need to be listed on SSE to attract Chinese investors, as a cross-border investment channel to connect China and Hong Kong has already been in place since 2014. Of course, the Chinese government can easily change Shanghai Stock Exchange’s listing standards, provide monetary or political incentive to list in China, or simply prohibit these Chinese companies from carrying out secondary listings in HKEX or any other exchange. As the Chinese government has not done any of the above, such acquiescence should also be noteworthy in this analysis.
Last but not least, several cases have provided precedent showing that investors in HKEX give Chinese companies a higher valuation than US investors, which might be due to lack of understanding of these Chinese companies and the US’ preference to invest in domestic players. HKEX is growing bigger by opening its arms to these Chinese “refugees,” and has raised $51.5 billion by IPOs in Hong Kong, ranking second in the world.
What’s Happening With Pre-Listed Japanese “Refugees”
Many companies in Japan that have been aiming for IPO haven’t been able to secure an auditor for IPO preparation. The exact figure of companies being rejected by auditors is unknown, but there have been a growing number of reports on this phenomenon, and some of the most famous auditing companies like KPMG Japan have even announced that they will not take on any new IPO clients for a year.
One central cause for this is due to auditing firms that unwilling to waste their resources on a reputation risk. There have been an increasing number of incidents of fraudulent accounting by listed companies in recent years. In 2020, 58 cases were reported, including historically prestigious companies like TOSHIBA and Itochu, while the others are newly listed startups like LIXIL. Auditors fear damaging their reputation by taking on more clients that may be involved in such fraudulent activities.
Secondly, auditing firms have been stretched thin due to increasing demand. The number of IPOs have been growing steadily since the Financial Crisis of 2008. There were 107 companies listed in 2020, which is about twice the number that were listed a decade ago. Additionally, Tokyo Stock Exchange has a very low unlisting rate, causing the number of listed companies to pile up. Currently there are 3,831 public companies in Japan, while there were only 2,290 in 2011.
Lastly, due to new regulations established by the Japanese government on working hours for almost all industries, auditors are in shorter supply than ever. Auditing firms are infamous for their grueling long hours and the new regulation has set a strict upper limit on how long an employee can work every day and every month. With such limitations, auditors are more focused on serving the larger, pre-listed corporations rather than the to-be-listed companies in order to maximize their firms’ returns.