Once a badge of honour among Chinese companies, a US listing was regarded as the alpha and omega for any Chinese corporation, offering greater control for its founders, better range of motion in mergers and acquisitions and above all prestige.
Fast forward to the coronavirus downturn and an increasing number of Chinese companies are looking to delist and go private as stock markets tank and US regulators ramp up the pressure.
In a sign that US regulators are moving towards zero tolerance, the US Securities and Exchange Commission (SEC) reiterated the importance of emerging market risk disclosure in a note to investors on its website on April 21.
Despite the fact that many China companies are listed on US exchanges, they do not adhere to Sarbanes-Oxley Act accounting rules, a source of ongoing frustration for the Public Company Accounting Oversight Board (PCAOB) and SEC chairman Jay Clayton.
Clayton last week publicly warned investors against putting their money into Chinese companies that have continuing issues around company disclosures.
CHINA INC. LOOKS FOR THE DOOR
As a result, more US-listed Chinese companies are looking for a way out.
“We’ve had more inquiries coming from US-listed Chinese companies these days about privatisation,” one investment banker told FinanceAsia. “People want to take advantage of the current (low) stock market.”
For many Chinese companies, now is the perfect time for a privatisation.
The S&P 500 plunged to the lowest 2,237 on March 23 from a high point of 3,373 in February and is still struggling to make back its losses. It’s been the same story on the Nasdaq Composite which fell some 27% from February to March.
US regulators have also turned up the heat on Chinese American Depositary Receipt companies with a resultant impact on their share price.
On April 23, investors saw an all-out attack on all Chinese companies. Bilibili’s stock price fell 7.25% on that day, while Pinduoduo dropped 5.71%, Vipshop fell 7.64% and even titans like Alibaba ended with a sharp drop.
But Chinese companies have been mulling privatisation long before this and the Covid-19 outbreak seems only to have sped up the whole process.
According to research published by Haitong Securities, 49 Chinese companies that once listed in the US went private from 2010 to 2019. In total, 30.8% of the Chinese ADR companies went private after their IPO in the US.
In some cases, Chinese companies have been trying to delist so swiftly that they have faced opposition from shareholders. Jumei International, the e-commerce website which listed in 2014, privatised the company despite continuous objection from small investors.
Chairman Leo Chen offered a buyback price of $20 per share. But Jumei had already adjusted the ADR ratio, combining ten original shares to one in a notice in January. Comparatively, the current buyback price is less than 10% of Jumei's IPO price back in 2014.
Jumei’s first privatisation attempt failed in 2016 but, now with a volatile market and spooked investors, they have managed to push it through.
A-SHARES TO GAIN
As it’s become clearer that Chinese companies are having a hard time in the US, investors are now turning their attention to Hong Kong and even China A-shares.
Despite the global impact of COVID-19 on the capital market, A-share IPO activity has remained stable, ranking first both in deal numbers and proceeds, Ernst & Young said in a report last month.
“Chinese A-stock and the STAR Market are shortening the reviewing process to encourage companies combating this Covid-19,” Nisa Leung, partner of Qiming Venture Partners told FinanceAsia in an interview. “
“Our portfolio companies may seek out more STAR Market IPO in the future.”
Qiming just closed a $1.1 billion fund to invest in healthcare and technology startups earlier this month.
"Shanghai, Shenzhen and Hong Kong are likely to take the top 3 places on the global IPO market this year," Mike Suen, partner at law firm Withers told FinanceAsia.
"I have doubts about mega-size IPOs coming in this year as the Covid-19 outbreak will be a barrier. Previously, some US-listed Chinese companies were thinking about a second IPO in the Hong Kong market but they may want to reconsider the timing.
“Charles Li of HKEX is really trying hard to attract more companies, such as adding dual voting right companies into the theme," Suen added.
“In general, Hong Kong will likely gain more IPO cases under the current investor sentiment,” a lawyer at an international law firm told FinanceAsia. “We still see some companies preparing to list in the US stock market amid the Covid-19 outbreak, but these are less exciting candidates.”
Although tech companies might still choose the US market as their final destination, investors are becoming increasingly wary about Chinese companies.
The latest guidance from the SEC comes shortly after the blowout of the Chinese Starbucks , Luckin Coffee, whose share price collapsed more than 80% in less than four weeks. It is currently banned from trading.
Can Chinese companies shake off the perception that they are cooking their books as hot as their caffe lattes? As of press time, the China Securities Regulatory Commission has raided Luckin Coffee’s headquarter in Xiamen.
Whether it’s a serious attempt to get real with transparency or simply an empty gesture remains to be seen.