STOCKS: China Eyes Quick Route Home for Offshore-Listed Firms
Bottom line: A new plan allowing offshore listed Chinese firms like Alibaba and Tencent to make secondary listings at home appears to have momentum and could stand a better than 50 percent chance of success.
A mix of politics and business is in the air this week, as the annual National People’s Congress takes place in Beijing, including a concurrent gathering of business leaders who advise the nation’s legislature. Those leaders include most of the country’s leading high-tech CEOs, who are all getting peppered with questions about whether they would re-list at home if given the chance.
Most of those leaders are doing the politically correct thing and saying “of course,” including chiefs of Internet giants Baidu (Nasdaq: BIDU), Tencent (HKEx; 700) and Ctrip (Nasdaq: CTRP), just to name a few. (Chinese article) Such talk is really a bit cheap and would be quite impractical in the current market, since de-listing such massive firms from their current markets would require tens of billions of dollars in most cases, and even hundreds of billions in the case of a massive company like Tencent.
But what has people buzzing this year is word of a new plan that would see Beijing roll out a China Depositary Shares (CDR) program similar to the popular American Depositary Shares (ADS) program now used in the US. Such programs allow companies with primary listings in one market to make major secondary listings in other markets. The program is quite popular in the US, with major China- and Hong Kong-listed state-owned enterprises like PetroChina (HKEx: 857; NYSE: PTR), Sinopec (HKEx: 386; NYSE: SNP) and China Mobile (HKEx: 941; NYSE: CHL) all trading in New York using ADSs.
With that fact in mind, media are reporting that China is now considering its own CDR program that would provide a fast and easy way for many of the nation’s offshore-listed tech and other venture-backed companies to return home. (English article) An article from Caixin, one of China’s leading business publications and my current employer, says the Chinese securities regulator is currently studying several plans to lure home overseas-listed firms, and the CDR plan is one of those.
The plan appears to be quite advanced, according to the report, with eight firms already hand-picked to trial the CDR program. Seven of those are the biggest overseas-listed tech firms, namely Alibaba (NYSE: BABA), Baidu, Tencent, JD.com (Nasdaq: JD), Ctrip, Weibo (Nasdaq: WB) and NetEase (Nasdaq: NTES). The eighth company on the list, Hong Kong-listed Sunny Optical (HKEx: 2382), is one that I’ve never heard of, and I’m sure there’s some kind of backroom story that enabled it to make it into this prestigious group.
The fact that such a specific list of companies is being discussed seems to indicate the plan is probably quite advanced and perhaps could come to fruition soon. But that said, we should also point out this kind of effort has been tried before and ultimately failed. The most ambitious program was previous plans for an separate, Shanghai-based international board that got discussed several times but was ultimately shelved.
More recently we’ve heard frequent discussion of allowing these overseas-listed companies to jump the queue when applying for domestic listings. Many companies like Alibaba eschewed China listings for a number of reasons, but one of the biggest was due to the long wait times for approval due to a big backlog of applicants. This is partly due to the regulator’s decidedly anti-market approach, which sees it frequently slow or completely stop approval of new IPOs during times of market volatility.
This new CDS program would help to get around all of that, since such shares would technically not require a formal IPO review and thus could still be considered even during these IPO bans. What’s more, the process should theoretically be much simpler, since all of these companies are already listed overseas and thus have already been vetted by the US or Hong Kong securities regulators, which are both quite capable.
This new plan would have the big advantage of allowing both western and Chinese investors to buy into these popular companies. It would also avoid the complex and costly issue of privatizations from New York and Hong Kong and re-listings in China that some companies have already tried. For all those reasons, I’m guardedly optimistic that perhaps this latest plan to bring home offshore-listed Chinese firms could stand a better than 50 percent chance of success. But I also wouldn’t be surprised if it ultimately falls apart, repeating a pattern we’ve seen quite a few times in the past with this kind of reform.