STOCKS: Lenovo, China Telecom Mull CDR Homecomings

Bottom line:  Hong Kong-listed “Red chip” stocks like Lenovo and China Telecom could eventually make secondary listings in China under a new CDR program, but will be forced to wait behind higher-profile Internet names like Alibaba.

‘Red chips’ eye China listings under CDR program

With all of the major IPOs for the week now in the history books, as most of the world takes a vacation for Good Friday, I thought I’d close out the week here in China with yet another angle on the China Depositary Receipt (CDR) program that is creating lots of buzz. Regular readers will know this is a reference to China’s planned take on the popular American Depositary Receipt (ADR) program that lets companies with a primary listing in one market make secondary listings in another one.

Lots has been written these last couple of weeks about how the CDR program could let U.S.- and Hong Kong-listed tech giants like Alibaba (NYSE: BABA) and Tencent (HKEx: 700) make new secondary listings in China, which they couldn’t do before. But today we’re getting the first few peeps about similar homecomings from top executives of a group of Hong Kong-listed companies known as “red chips”, which are major Chinese firms that are currently barred from listing at home.

In this case, the companies that have commented on the matter are Hong Kong-listed PC giant Lenovo (HKEx: 992), and China Telecom (HKEx: 728; NYSE: CHA), the smallest of China’s three major wireless carriers. None of the comments are too earth-shattering, and the only reason we’re even hearing them are because it’s earnings season in Hong Kong and thus top executives from many major firms are getting asked about the subject at their regular earnings press briefings.

Still, this group of red chips would also be strong candidates for secondary listings back in China, which could have interesting implications for their Hong Kong-and New York-listed shares, especially if those shares are more highly valued in China as CDRs.

These “red chips” and companies like Alibaba are two different kettles of fish in terms of the organizational tricks they use to shed their China roots in legal terms and become eligible for offshore listings. But the common element they share is that both groups are technically domiciled outside China, most often in the Cayman Islands. That makes them eligible for listings in New York, Hong Kong or pretty much any other foreign market. But it also disqualifies them from listing in China, even though in reality they are quite Chinese and most of their operations are in China.

CDRs to the Rescue

Enter the CDR program, which could finally eliminate that barrier by allowing offshore-based companies to make secondary offerings using shares that would probably be traded in Shanghai. This particular program is quite similar to another one that was floated about a decade ago, involving the set-up of an international board in Shanghai. At that time, Lenovo regularly said it would be interested in floating its shares on that board, and the big Chinese telcos were also frequently mentioned. But the plan never was never completed.

Now the latest reports are quoting the president of Legend Holdings (HKEx: 3396), Lenovo’s parent, saying Lenovo “presents an interest” to return to China’s A-share market using the CDR program. (English article) The wording is a bit odd, perhaps due to translation issues, but the meaning looks relatively clear, i.e. that Lenovo would be interested in a China homecoming using CDRs if given the chance.

Another similar report cites China Telecom Chairman Yang Jie saying his company has studied the CDR program but doesn’t have any concrete timetable. (Chinese article) That’s not too surprising, since the program hasn’t even been officially announced yet. What’s more, the program is really more aimed at China’s high-tech superstars like Alibaba and Tencent (HKEx: 700), rather than these stodgier older-school companies like Lenovo and China Telecom.

At the end of the day, it’s still not completely clear if these red chips will be welcome for listings back in China, which at least initially looks like it will be targeting a small group of elite Internet companies. Technically CDRs could be floated by a wide range of just about anyone based outside China, with even global names that do big business in the country like Coca Cola (NYSE: KO) or Microsoft (Nasdaq: MSFT) eligible to list such CDRs. But for the moment, at least, I suspect we’ll see the big tech names mostly selected to do this program in the first year after its launch, which will supposedly happen sometime around June.


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