Pinduoduo, NIO among 27 ADRs which could be eligible for secondary listings in Hong Kong -Goldman report

Pinduoduo, NIO among 27 ADRs which could be eligible for secondary listings in Hong Kong -Goldman report

As many as 27 Chinese-American depositary receipts (ADRs) could be eligible for a secondary listing in Hong Kong, with the city likely to embrace companies that want to come home amid rising risks of US-listed Chinese firms being delisted, according to a report by Goldman Sachs.

Some 27 ADRs, including e-commerce giant Pinduoduo and electric carmaker NIO, with a total market cap of around US$250 billion, would likely qualify for secondary listings in Hong Kong, according to a report published by the US investment bank on Monday.

The list may shed light on potential candidates for future secondary listings in the city. However, sentiment is currently fragile after Chinese ADRs and tech firms listed in Hong Kong plummeted following Didi Global’s decision to delist in the US amid a cybersecurity probe by Beijing.

A Hong Kong listing would give foreign investors in these companies another avenue to cash out, as they will be able to convert their ADRs into Hong Kong shares, as the two will be fully interchangeable.

Pinduoduo and NIO are the largest Chinese ADRs in the list compiled by Goldman, with market caps of US$114.3 billion and almost US$70 billion respectively. Didi, which has already announced its intention to list in Hong Kong, was the third largest at US$39.2 billion.

Housing transaction services provider KE Holdings, Lufax Holding, Tencent Music Entertainment Group, and e-commerce company Vipshop Holdings were also on the list.

Under criteria set by the Hong Kong stock exchange, companies can have either individual or corporate weighted voting rights (WVR), a structure that allows founders and key managers to own shares with more voting rights than others.

The WVR applicant’s market cap also needs to exceed HK$40 billion (US$5.13 billion), or more than US$10 billion if its revenue surpasses HK$1 billion based on HKEX rules. The Goldman list, however, does not include other requirements, such as companies that seek secondary listings in the city must have at least two years of financial track record and regulatory compliance on a qualifying exchange.

News of the ride hailing giant’s decision to delist in the US has exacerbated market worries of a deeper economic decoupling between China and the US. There are also concerns that increased regulatory pressures – in both countries – could force more Chinese ADRs to delist from the US.

Bloomberg reported on December 1 that Chinese regulators are mulling plans to ban companies from listing overseas in a variable interest entity (so-called VIE) structure, although the China Securities Regulatory Commission on Sunday denied any imminent restrictions on overseas listings.

The US Securities and Exchange Commission (SEC) on December 2 finalised rules for the US Holding Foreign Companies Accountable Act. The Act will force foreign companies to delist from US exchanges if they fail to turn over audit results for three straight years, a window that is expected to expire by late 2023.

“ADRs that engaged in voluntary delisting have usually seen positive returns in the lead-up to their privatisation/delisting but those that were forced to delist tended to underperform,” said Goldman analysts, led by Kinger Lau. “However, this trading pattern may not be applicable to a broad-based regulation induced or company specific delisting scenario.”

Around US$1.5 trillion of the market value of Chinese ADRs and tech companies has evaporated since a peak in mid-February, equivalent to a 50 per cent correction or 10 per cent of China’s 2020 total gross domestic product.

Didi, for example, plunged 22.2 per cent in the US last Friday, the biggest daily drop since its June 30 initial public offering. Pinduoduo shed 8.2 per cent on the same day. The sell-off continued into Monday, as the Hang Seng Index shed 1.8 per cent while tech stocks listed in Hong Kong lost 3.4 per cent – the biggest slump in almost three months.

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