In a modern-day story that reflects the legendary pilgrimage of the heroic characters depicted in the 16th-century classical Chinese novel Journey to the West, sailing to the other side of the Pacific Ocean and ringing the opening bell on the Nasdaq stock market marked the epitome of glory for a generation of Chinese tech entrepreneurs.
But decades later, “homesick” Chinese companies are on the way back to their home turf, either by relocating their primary listings away from the United States or beating a path to a secondary listing in a “safe port” like Hong Kong.
The nudge to trek home represents a vote of confidence in Asia’s financial center, which has been in the eye of a geopolitical storm for years.
The impetus for the fresh bout of their reverse pilgrimage remains as old as time — stringent regulatory curbs, short-seller attacks, and the failure of foreign investors to adequately value them. But it comes at a delicate moment as the threat of decoupling of the world’s two largest economies escalated over a host of economic and geopolitical issues.
Recent blockbuster secondary listings of Chinese mainland tech titans JD and NetEase, as well as highly sought-after IPOs of mainland biotech firms, have not only boosted the share price of Hong Kong Exchanges and Clearing by nearly 43 percent so far this year, but also come as a testament to the city’s long-cherished allure. The listings are seen as a snub to the US, which has stripped Hong Kong of its special trade status and imposed sanctions on individuals and entities deemed to be eroding the city’s autonomy in the wake of the National Security Law for the special administrative region.
“At least in the near term, we think Hong Kong may be the likely venue for many mainland ADRs (American depositary receipts) — an easy, liquid way for US investors to own foreign stocks — to ‘return home’, given its easier access to foreign capital and broader investor base,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities.
He agrees with Paras Anand, chief investment officer, Asia Pacific, at Fidelity International, who believes that the “epic migration” of mainland listings is set to accelerate in the next few years, as Hong Kong’s market reforms are dismantling the listing and financing hurdles for tech firms.
Hong Kong launched its most significant listing reforms in 25 years in April 2018 as it upped the ante in its competition with New York for the highly sought-after new-economy and biotechnology listings.
The changes have opened the floodgates for companies from emerging and innovative sectors with a weighted voting rights (WVR) structure, as well as biotech companies without any track record of revenue or profit, to float in the SAR. They also offer a concessionary secondary listing route for Chinese and international innovative companies listed on qualifying exchanges overseas.
Back to the home market
The sweeping reforms dismantled the barrier that caused Hong Kong to lose out to Wall Street on Alibaba Group’s US$25 billion deal in 2014 — the world’s largest IPO to date.
In a sign of the local bourse’s determination to welcome back “homesick” mainland enterprises listed overseas with open arms, the 50-year-old benchmark Hang Seng Index also undertook its biggest reform in 14 years. The gauge, along with the Hang Seng China Enterprises Index, said in May it will admit mainland companies with a WVR structure and those with secondary listings as constituent stocks.
More companies are likely to follow in the footsteps of Alibaba, which brought the world’s second-biggest listing to Hong Kong last year when it raised US$13 billion through a secondary offering, said Jackie Chien, capital markets director for Greater China at Fidelity International.
The mega float, which Alibaba Chief Executive Zhang Yong called a “homecoming”, was a vote of confidence in Hong Kong following months of violent anti-government protests.
“And the gravitational pull has shifted. China’s economy today is 10 times bigger than it was in the 1990s, while the rise of Asian capital markets provides global investors with access to great investment opportunities outside the US,” Anand wrote in his latest report. “Hong Kong offers the additional benefit of mutual market access between the mainland and the outside world through a trading link known as the Stock Connect,” he said.
With both A-shares and Hong Kong markets shaping up as viable rivals to Wall Street in the race for the new economy’s IPO crown, Steven Yang Lingxiu, chief strategist at Citic Securities, believes that Hong Kong is fully capable of being the “go to” destination for US-traded mainland firms seeking a foothold closer to home.
Hong Kong’s current listing regime allows companies to maintain the existing variable interest entity structure to go public, he said. The VIE structure is used as a method for mainland domestic entities to gain access to international capital markets through offshore listings, and enables foreign investors to indirectly invest in restricted or prohibited sectors on the mainland.
“Although Shanghai’s sci-innovation board and the reformed Shenzhen’s ChiNext startup board have also set the stage for VIE-structured companies, the bar remains relatively high and rules have yet to be tested,” Yang wrote in a recent research report.
In fact, Hong Kong’s streamlined listing process has put mainland companies listed overseas on the fast track for a planned Hong Kong float. “It takes roughly three months to get all the preparation work done,” said Edward Au, Deloitte’s co-leader of the national public offering group.
“Certainly, the homecoming of US-traded mainland firms will be the focal point for the Hong Kong stock market in the second half of 2020.”
Yang said, “Equally important, the return of US-traded mainland firms will help reshape Hong Kong’s stock market, which has long been dominated by the traditional real estate and financial services sectors.”
Tan Congyan, vice-president of the China Institute of Finance and Capital Markets, said: “A stable and well-established capital market means a great deal to Hong Kong. A capital market, indeed, is Hong Kong’s calling card on the international stage.”
“The homecoming of large-cap mainland companies listed overseas will continue to set a good example for more followers to join the fray. They have what it takes to become the backbone force of the city’s capital market, helping to cement Hong Kong’s status as the world-leading financial center,” Tan said.
As many as 39 US-traded mainland firms are believed to have the potential for a secondary listing in Hong Kong, according to statistics from financial market data provider Refinitiv. The top 10 US-listed mainland companies by market capitalization are all on the list.
Refinitiv data shows that 415 mainland enterprises are currently listed on US stock exchanges, accounting for 3 percent of total market capitalization. By market capitalization, 73.6 percent of the US-listed mainland companies are from the technology sector, with Alibaba taking up 48.5 percent overall, followed by consumer cyclicals with 13.6 percent. As of Aug 3, 22 mainland companies had successfully listed in the US this year, compared with 30 last year and 38 the year before. During this period, as many as three companies were delisted, including gaming company Changyou and online cosmetics retailer Jumei, whose high-profile founder, Chen Ou, was crowned the youngest CEO of a publicly listed company in China in 2014.
