U.S.-Listed Chinese Companies Face An Uncertain Market As They Accelerate Homecoming Plans

May 07, 2020

Chinese companies listed in the U.S. are following Alibaba in choosing Hong Kong for a secondary listing. But whether they would be welcomed with equal enthusiasm is a matter of uncertainty.

After the e-commerce giant raised $13 billion in the Asian financial hub in November, the largest share sale in Hong Kong in nine years, its competitor JD.com and online gaming giant NetEase are also tapping the city for secondary offerings. The two companies are widely reported to have filed confidentially for a secondary listing application with the Hong Kong stock exchange and hired investment banks to work on the process.

While the timing and size of the offerings are still being decided, these companies aren’t simply selling shares in return for cash. Beijing has long viewed it as undesirable that the country’s best tech firms are listed in overseas exchanges.

Plus, with U.S. securities regulator openly calling out China and warning of disclosure risks following the high-profile accounting scandal of Luckin Coffee, there is a market overhang in the valuation of all U.S.-listed Chinese stocks, says Oliver Rui, a professor of finance and accounting at the Shanghai-based China Europe International Business School.

“Going home is a trend,” Rui says. “Because of Luckin Coffee, the SEC (U.S. Securities and Exchange Commission) will step up regulation of Chinese companies.”

But the problem now is whether they can excite the market enough and unlock a valuation premium at home. Thanks to an investor base that is more familiar and optimistic of its business model, Alibaba jumped 7% within the first hour of its Hong Kong debut. It now trades at a price-to-earnings ratio of 34 times in the city—significantly higher than its P/E of 21 in New York.

Alex Wong, director of asset management at Hong Kong-based Ample Capital, says other Chinese companies are unlikely to be as highly valued. Although investors are viewing internet and tech stocks with growing interest after Hong Kong relaxed listing rules for them in 2018, not everyone would enjoy a blockbuster homecoming.

Hong Kong's benchmark Hang Seng Index, for one, is down 16% so far this year as the coronavirus pandemic roils financial markets worldwide. And amid a global economic slump, China’s recovery from a 6.8% GDP contraction in the first quarter is taking longer than expected.

Some internet companies may enjoy a temporary surge in usage as more people stay at home to avoid the coronavirus, but the scope of their business still don’t match Alibaba or Tencent’s all-encompassing offerings of entertainment, enterprise service, online shopping and financial payment.

“A large part of the premium BABA received, however, was due to the company itself,” Brock Silvers, chief investment officer of Hong Kong-based Adamas Asset Management, referring to the symbol Alibaba currently trades under in the U.S. “That won’t apply to every ADR (American depositary share) that re-lists in Hong Kong.”

But this isn’t to say the planned listings would flop. Outperforming the S&P/BNY Mellon China ADR Index’s 12% drop so far this year, both JD.com and NetEase have seen their Nasdaq-listed shares rise 15% and 4%, respectively. The stock-connect scheme between Hong Kong and mainland Chinese cities of Shenzhen and Shanghai would also allow more investors to trade the companies’ shares.

Zhu Ning, deputy dean at Shanghai Advanced Institute of Finance of the Shanghai Jiao Tong University, says other major tech companies such as the $59 billion online shopping site Pinduoduo and $34 billion search engine operator Baidu, both also listed on the Nasdaq, could also consider Hong Kong.

With hopes of bringing more fast-growth companies to a stock market long dominated by less dynamic firms like banks or state-run enterprises, Hong Kong made changes to its listing rules—including allowing founders to have greater voting rights—after losing Alibaba to the more tech-friendly New York in 2014.

But as choices line up, investors are bound to take a closer look at share valuations. When asked if he’d buy into the secondary listings, Ample Capital’s Wong says it depends.

“U.S. shares are now cheaper, because U.S. recovery isn’t fully priced in,” he says. “In the meantime, we are not having positions on NetEase, Pinduoduo or JD.com. It actually depends on the situation later on.”