US-listed Chinese companies and unlisted domestic enterprises make a beeline for HK

The new year is truly in, and has presented a new dilemma or two to capital-hunting Chinese firms: to list or not to list?

And if the decision is to list, will an overseas float produce a bigger bang for the buck or a domestic public issue?

And those already listed overseas have another issue to contend with: should they delist and make a fresh IPO back home?

Ever since ride-hailing giant Didi's fortunes suddenly reversed last year, more and more companies are finding themselves on the horns of a similar IPO dilemma.

Didi's IPO on the New York Stock Exchange on June 30 pulled in over $4 billion, the highest amount raised by any Chinese internet-driven company in 2021 and the second-largest IPO of all US-listed Chinese companies, next only to Alibaba's ($21.8 billion on the NYSE in September 2014).

However, on Dec 3, Didi announced it will delist from the NYSE and start preparations for a float on the Hong Kong stock exchange instead.

The souring environment in the US stock market has been one of the reasons for Didi's heading home. A day before Didi's delisting announcement, the US Securities and Exchange Commission adopted final amendments to its rules implementing the Holding Foreign Companies Accountable Act of 2020.

Under the revised version, US-listed companies will have to get their audit reports inspected by US regulators and abide by more local accounting rules. Otherwise, they will be delisted from the US exchanges in three years.

A company's audit reports include all the work records like data on operations and capital exchanges. Chinese companies are now allowed to provide documents and materials related to securities activities to overseas institutions without the permission of Chinese regulators.

Of course, the door is not shut for outbound Chinese companies. The China Securities Regulatory Commission issued a statement on Dec 24 to publicly solicit opinions on relevant systems and rules for overseas listings.

The country's top securities watchdog said in the statement that Chinese companies are allowed to list overseas 20 days after filing the necessary documents with the CSRC. Variable interest entity or VIE structure companies that meet the compliance requirements can list overseas after the required documentation work is completed in China.

But the complexity and uncertainty have already cast a long, dark shadow on Chinese companies' US listing plans. In all, 42 Chinese companies completed US IPOs in 2021, up 20 percent from the level of the COVID-savaged 2020. But, crucially, only four made their IPOs in the United States in the second half of last year, as per data provided by Deloitte, a global provider of audit, consulting, tax and advisory services.

At the same time, Hong Kong emerged as the preferred destination of IPO-bound Chinese firms. Five of the top 10 IPOs in Hong Kong last year were by Chinese companies that were hitherto listed in the US. These firms and unicorn companies accounted for over 90 percent of the top 10 IPO proceeds, according to EY, another global provider of audit, consulting, tax and advisory services.

Given that the going is no longer smooth for US-listed Chinese companies, their return to China may be a major theme in Hong Kong IPOs this year, stock market insiders said.

According to David Chin, China country head at UBS, a Swiss financial services giant, there are about 240 Chinese companies listed in the US at present. Their total market capitalization could be around HK$9.2 trillion ($1.44 trillion). Some 17 of these have already completed their secondary listing in Hong Kong, accounting for 69 percent of the HK$9.2 trillion mentioned earlier.

In this sense, the challenge facing US-listed Chinese companies has been addressed to a great extent. Meanwhile, there are another 50 companies that have not been listed in Hong Kong but meet the requirements to go public in the city, said Chin.

These companies account for another 30 percent of the HK$9.2 trillion market cap. They may choose to float on the Hong Kong bourse this year. If they do, that would mark the easiest and possibly the smoothest transition these companies could take, considering the US regulators' hardening stance, he said.

For the rest 170 US-listed Chinese companies, which account for less than 2 percent of the total market cap of their kind, they do not meet the listing rules in Hong Kong for the time being.

Chin said there are two possible ways out for such companies. They can either hope for the Hong Kong bourse loosening its listing policies this year or delist in the first place and restructure later so that only part of their business can be listed in Hong Kong or the STAR Market of the Shanghai bourse.

Felix Fei, EY assurance partner, said new economy companies in the TMT (technology, media, and telecom), biotechnology and healthcare sectors will likely be the main players seeking Hong Kong IPOs this year, in anticipation of the return of some US-listed Chinese companies. They will also become the driver of the Hong Kong's economy next year, he said.

In an interview with Reuters in late December, Gordon Tsang, partner of the Hong Kong-based Stevenson, Wong & Co law firm, said the third and fourth quarters of this year will witness the highest number of returns of US-listed Chinese companies to the Hong Kong stock exchange or the Chinese mainland's A-share market.

In a sense, the way has been paved already for the return of overseas-listed Chinese companies. Secondary listing regulations were revised in Hong Kong in November. The Stock Exchange of Hong Kong Ltd, a wholly owned subsidiary of Hong Kong Exchanges and Clearing Ltd－operator of the Hong Kong bourse－said in an announcement that non-innovative companies without a weighted voting rights structure will be allowed to have secondary listings in Hong Kong.

The minimum market cap for a secondary listing in Hong Kong has also been lowered under the revised regime, which took effect on Jan 1.Chinese issuers without a WVR structure can seek a secondary offering if their market cap reaches HK$3 billion with a track record of good regulatory compliance for five full financial years on a qualifying exchange such as the Nasdaq. For those with a market cap of at least HK$10 billion, the compliance period will be shortened to two full financial years.

Prior to the revised policies, such secondary listing applicants to the Hong Kong exchange were required to ensure their respective market cap reached HK$40 billion at the time of listing. If not, a minimum market cap of HK$10 billion combined with a minimum HK$1 billion of revenue for the most recent audited financial year sufficed.

James Wang, head of equity capital market for Goldman Sachs in Asia ex-Japan, said that Hong Kong has a large base of international investors and issuers. The wave of returning US-listed Chinese companies will rise in Hong Kong in the coming months, while more and more Chinese companies will also seek IPOs in Hong Kong.

But they would face challenges on their way. For instance, the less-than-stellar record of the Hong Kong bourse in 2021 is causing concern to IPO aspirants, market insiders said. The exchange recorded 94 IPOs last year with total financing coming to HK$323.7 billion, according to EY.

The two key local gauges fell 35 percent and 19 percent year-on-year, respectively. The Hang Seng Index dropped 14 percent in 2021 and the Hang Seng Tech Index touched a historic low by shedding more than 30 percent.

The lower liquidity of the Hong Kong stock exchange may delay US-listed Chinese companies' plans to return home, said Lu Jie, head of investments for China at Robeco, a global asset management firm.

The average daily turnover of the securities market in Hong Kong was HK$166.7 billion last year, according to data from Hong Kong Exchanges and Clearing Ltd.

Lawrence Lau, EY assurance partner, admitted that Hong Kong's IPO activities will continue to develop vigorously. But investors still need to keep an eye out for a few objective factors, including the persisting upside risk of global inflation, the potential fluctuations in overseas stock markets due to the US Fed's tightening cycle process, and the potential pressure on overseas capital outflows due to Fed's potential cuts in government-backed debt purchases and interest rate hikes.

China-US relations and the challenges of the geopolitical landscape also add uncertainties to the investment arena, Lau said.