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Asia CommentGC Asia View

Chinese tech firms should have a plan B

Short Term, Medium Term, Long Term Plan

Didi’s listing U-turn shows worst is nowhere near over for Chinese technology issuers and investors

The Hong Kong exchange will likely be the main winner at the end as more technology companies ditch US listing plans in favour of an IPO closer to home. But in the near term at least, the market should hunker down for some more turbulence — while putting together a plan B.

If there’s one thing Asia’s equity markets will be remembered for in 2021, it will be the perilous nature of investing in Chinese technology stocks, given the government’s intention to remake the sector.

Just take Didi Global’s travails as an example. The Chinese ride-hailing company has said it will delist from the New York Stock Exchange and IPO in Hong Kong — a dramatic turnaround that comes just five months after its US debut.

Admittedly, Didi is a special case. The firm rushed through a multi-billion-dollar IPO at the end of the first half, ruffling the feathers of Chinese regulators that have been increasing oversight of technology companies that gather personal data. They swiftly brought the hammer down on Didi, launching a cybersecurity probe into the company, preventing it from signing up new customers. Beijing has been pushing Didi to leave the US and go public closer to home since then.

Didi’s move was not entirely unexpected given the extent of the pressure it has been under since its New York deal.

Yet, the market felt the chills from the implications. Didi’s US shares initially gained about 16% on December 3 — soon after its delisting announcement — before falling 12% within hours and ending the day more than 20% lower.

In the last five trading days to December 7, its American depositary shares have fallen 6.37%.

Other Chinese technology companies — both which are already listed and those seeking an IPO — should tread carefully and be prepared for the worst.

Will a spate of high-profile US delistings follow? That’s unlikely to be the case for the time being at least, but issuers, equity investors and investment banks should keep a close eye on the regulatory risks emanating from China.

One way tech companies already trading in the US can mitigate some of the risk is by planning a move closer to Mainland China with secondary listings in Hong Kong.

This is already an increasingly popular trend that began with New York-listed Alibaba Group Holding’s dual listing in Hong Kong in late 2019. Since then, firms like NetEase, Baidu and Weibo Corp have also listed their stock in the city.

Since Alibaba’s so-called homecoming listing, investors have shifted away from its American depository receipts toward its Hong Kong-listed shares. By December this year, BNP Paribas analysts estimated around 70% of Alibaba’s stock was held as ordinary shares on the HKEX.

The market for homecoming listings was snowballing in the first half of 2021 but dried up with the rest of the Chinese IPO deal flow from the early summer as US-China tensions over ADR listings heightened and Beijing railed against overseas IPOs.

But Weibo restarted the trend last week with its HK$3bn ($384.7m) secondary listing in Hong Kong.

Where well-known names go, smaller ones should follow. The city’s ECM is still liquid — and more homecoming IPOs will likely be eagerly welcomed. No company wants to be forced to delist but planning ahead for a secondary float can go a long way towards supporting a firm’s stock price.

There is also growing pressure from the US Securities and Exchange Commission, which has now firmed up a law that foreign companies trading in the US should open up their accounting books to the US, or risk being delisted within three years.

Chinese tech firms worried about disclosing additional data to the US can find a more receptive regulatory environment in Hong Kong.

The stress on the sector is not over yet, especially given recent rumours that Chinese regulators are preparing to block firms in sensitive sectors from using variable interest entity structures for an offshore listing. VIEs have long been used by the likes of Alibaba and Tencent to raise billions from international investors. A ban on its future use could restrict firms from accessing foreign money for their businesses.

Investing in Chinese stocks has long been a gamble. But the upheaval in the past year has shown how quickly sentiment can change amid an unpredictable regulatory environment.

The Hong Kong exchange will likely be the main winner at the end as more technology companies ditch US listing plans in favour of an IPO closer to home. But in the near term at least, the market should hunker down for some more turbulence.

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