The Lucrative Opportunity for Chinese Firms in Delisting from US Exchanges
A growing number of Chinese companies, caught in the crossfire of competing regulators, are opting to delist from US exchanges, particularly following Didi Chuxing’s recent announcement of its departure from the New York Stock Exchange.
The focal point, however, should not revolve around determining the victor in the ongoing dispute between Chinese and American authorities concerning public company compliance with disclosure standards and financial audits.
Unless a harmonized approach to transnational audit regulation can be achieved—though a prudent goal, it appears unlikely in the near future due to political divisions—we should anticipate this dispute to linger unresolved.
In the midst of every financial upheaval, the market’s “invisible hand” tends to find a solution. Driven by the pursuit of returns, mobile capital invariably discovers a new haven. The regulatory dispute may not dissuade institutional global investors from their interest in and commitment to Chinese-listed companies.
In fact, many astute cross-border investors recognize that these companies represent excellent long-term investments. This is particularly true as they operate in sectors with substantial growth prospects, such as electric vehicles and e-commerce, with promises of expanding into fresh global markets.
Capital will likely follow suit as these departing companies seek listings in Hong Kong. When they listed initially in the United States, British and European investors held substantial positions.
Ultimately, company management will come to appreciate that offering investors transparency and accountability is not solely the cost of expanding equity participation. It is also integral to the corporate growth journey, offering numerous long-term benefits to all stakeholders.
The current wave of listed companies began with Alibaba’s monumental US$25 billion initial public offering in the US back in 2014. Since then, 282 Chinese companies have listed on US exchanges, accumulating a total market capitalization of US$1.7 trillion as of October. While this figure represents only a fraction of the exchange’s total market capitalization, it remains significant.
This year alone, 37 additional Chinese companies have embarked on US listings. However, with each passing day, these valuations are diminishing as Chinese companies choose to delist.
Part of this decline can be attributed to the volatile nature of US capital markets. Between hedge funds quick to abandon a stock, algorithmic program trading, and day traders, even the slightest headline risk or an earnings estimate miss can trigger a sharp price decline.
Enhancing direct communication with international investors, mirroring the approach these companies adopt for local shareholders, will be well-received by global shareholders. Practices like these have been exemplified by organizations such as Baidu and BeiGene, which have established investor relations structures to engage with investors and elucidate their earnings performance.
Many other companies fail to grasp the significance of communication with foreign shareholders and analysts in helping them understand their overarching strategies, let alone earnings discrepancies. Most of these companies lack a physical presence in the US and primarily concentrate their communication efforts within their home regions.
In hindsight, this may be viewed as a miscalculation. Neglecting to meet a deadline for a mandatory Securities and Exchange Commission filing will not go unnoticed, and it extends beyond regulatory scrutiny.
Alibaba, owning the South China Morning Post, boasts 44 US financial analysts covering its stock, a number almost the same as that of Amazon and surpassing Microsoft. That equates to a substantial number of individuals scrutinizing every disclosure, or the absence thereof, throughout the year.
Furthermore, it represents numerous questions that management must address; failure to do so in a clear, consistent manner carries consequences. Regardless of where a company chooses to list globally, analysts will diligently follow.
As the shift to the Hong Kong exchange gains momentum, many experienced global investors—especially those well-versed in emerging markets—will follow suit. Consequently, their queries and the necessity for management to revisit transparency will grow in parallel.
For those companies currently maintaining dual listings in Hong Kong and the US, such as JD.com, Baidu, NetEase, and Weibo, the potential to secure long-term investor commitment is even greater.
Once again, it involves embracing transparency and recognizing that, while governments may perpetually disagree on certain matters, investors and company management can often find common ground. Ultimately, this serves the best interests of all parties involved.
Montieth Illingworth is CEO and Global Managing Partner at Montieth & Company and co-CEO of Montieth SPRG.
This original version of this article was featured in the South China Morning Post.