To reduce delisting risk, more US-listed Chinese firms would pursue dual primary listings
Alibaba, the Chinese e-commerce giant, caused quite a stir last week when it revealed its intention to implement a dual primary listing. With China and the US trying to reach an agreement on audits and tensions continuing to persist between the two countries, more Chinese businesses listed in the US are expected to follow Alibaba’s suit.
After receiving approval from the Hong Kong Stock Exchange (HKEX), Alibaba will convert from a secondary listing to a primary listing by the end of the year. The Chinese tech giant went public in the US in September 2014 and completed a secondary listing in Hong Kong in November 2019.
Generally, companies seeking a primary listing in Hong Kong must adhere to more stringent requirements than those seeking a secondary listing. Once converted to a primary listing, Alibaba’s Hong Kong shares will be eligible for “Stock Connect”, a trade program that enables mainland Chinese investors to invest in the Hong Kong stock market.
Alibaba cannot be added to Stock Connect at this time due to its secondary listing status. Nonetheless, making Hong Kong the primary listing venue would grant the company access to mainland capital and encourage “broader and more diverse investments”.
According to projections from wealth management firm KGI Asia, Alibaba is anticipated to attract between HK$110 billion and HK$220 billion in mainland capital.
The dual primary listing mechanism has been thrust into the limelight by Alibaba’s most recent action. In fact, several US-listed Chinese firms have already completed dual primary listings or are in the process of doing so.
As announced in March, Bilibili is seeking to transform its Hong Kong shares into a primary listing, and the dual primary listing is scheduled for the fourth quarter. The GenZ-favorite streaming platform went public in the US in March 2018 and has had a secondary listing in Hong Kong since March 2021.
Prior to Bilibili, Chinese electric vehicle manufacturer Xpeng made its Hong Kong primary listing in July 2021, becoming the first Chinese stock to have a dual primary listing in the Asian financial hub and New York. According to Securities Times, at least eight Chinese stocks have undergone dual primary listings in the US and Hong Kong.
Tianfeng Securities believes that if these companies are included in the Stock Connect, their southbound capital flows will increase. “In the future, more Chinese companies are projected to opt for dual primary listing or convert from secondary listing to primary listing in Hong Kong,” it predicted. Southbound capital refers to mainland investors who purchase Hong Kong equities via Stock Connect. The opposite of the Southbound is the Northbound, which refers to Hong Kong and overseas investors purchasing mainland stocks.
Shanghai-Hong Kong Stock Connect was launched on November 17, 2014, while the Shenzhen-Hong Kong Stock Connect followed two years later, on December 5, 2016. Since its inception, Stock Connect has become the main cross-border investment conduit for regional and worldwide investors wishing to access and exit the Mainland and Hong Kong markets.
As of November 10, 2021, the cumulative turnover of Southbound Stock Connect was HK$23.1 trillion (US$2.94 trillion), bringing a net capital inflow of HK$2.1 trillion (US$270 billion) into the Hong Kong market, while mainland investors held HK$2.2 trillion worth of Hong Kong-listed shares through Stock Connect, according to HKEX.
To attract more overseas-listed companies, mainly US-listed Chinese enterprises, the HKEX amended its guidelines towards the end of 2021 to allow greater flexibility and clarify various routes for converting a secondary listing to a primary listing.
In addition, securing a primary listing in Hong Kong will allow Alibaba shares to continue trading even if they are delisted from US exchanges. It also applies to other Chinese corporations listed in the US that are at risk of delisting due to auditing differences between the two parties.
Last Friday, a few days after Alibaba applied for a primary listing in Hong Kong, the US Securities and Exchange Commission (SEC) added it to a delisting watchlist, stating that it would be removed from the New York Stock Exchange (NYSE) if its auditors could not be reviewed by the spring of 2024.
In accordance with the Holding Foreign Companies Accountable Act of 2020, which will go into effect in 2021, the US may prohibit securities transactions with companies whose auditors have not been reviewed for three consecutive years by the Public Company Accounting Oversight Board (PCAOB). Beijing has long denied US audit regulators access to the data of Chinese corporations listed in the US, citing national security concerns.
Dual primary listing in Hong Kong and New York is the best option to safeguard the interests of investors while complying with current political tensions, consulting firm The Bamboo Works said.
Although the dual-primary listing scheme will potentially boost the liquidity and pricing power of the Hong Kong stock market, it is still significantly inferior to the US market, the largest financial market in the world. Consequently, the majority of Chinese companies, including Alibaba, JD.com, and Baidu, have stated that they will comply with applicable laws and regulations and strive to maintain their listing status in New York.