A recent agreement to allow U.S. scrutiny of Chinese accounting firms will not stop Chinese technology, media and telecom companies trading on the U.S. exchanges from seeking dual listings in Hong Kong.
The U.S. Public Company Accounting Oversight Board, or PCAOB, which inspects and investigates public accounting firms around the world, recently struck a deal with the China Securities Regulatory Commission and China's Ministry of Finance to allow the auditing of registered public accounting firms headquartered in mainland China and Hong Kong. The deal came after a 2020 law that said companies audited by such accounting firms could not trade on U.S. exchanges if the PCAOB could not evaluate the accounting firms' work.
While the agreement brings greater transparency to financial markets, it does not eliminate the risk of potential delistings, market experts said. As such, technology, media and telecom, or TMT, companies may seek a secondary or a dual primary listing in Hong Kong as a way to hedge risk and reach more investors.
"If the new China-U.S. deal gets finalized, I believe many Chinese companies will seek secondary listings in Hong Kong in order to diversify their investor base and fortify their capital structure in case rules change again in the future," said Michael Ashley Schulman, chief investment officer of multifamily wealth management office Running Point Capital Advisors.
There were 264 public companies headquartered in China and Hong Kong that traded on U.S. exchanges, with a combined market cap of $870.08 billion as of Aug. 30. Broken down by sector, TMT was the most represented in the group, at 80 companies, a majority of which were in the software and services sector, according to data from S&P Global Market Intelligence.
Secondary listings
Several Chinese Big Tech companies listed in the U.S., including NetEase Inc., Weibo Corp. and Baidu Inc., and Chinese e-commerce leaders Alibaba Group Holding Ltd. and JD.com Inc., already have secondary listings in Hong Kong.
Among the most recent, shares in China's Tencent Music Entertainment Group began trading in Hong Kong on Sept. 21, debuting at HK$18 per share. The debut was a secondary listing, with Tencent Music's primary listing still in New York.
Several other Chinese companies listed in the U.S. are eligible for a secondary listing in Hong Kong, including financial services company AMTD Digital Inc., online recruitment company Kanzhun Ltd., and Baidu's subsidiary and streaming platform iQIYI Inc., according to data gathered by S&P Global Market Intelligence.
The Hong Kong listing requirements for companies include having a market capitalization of at least HK$40 billion, or a market capitalization of at least HK$10 billion and revenue of at least HK$1 billion for the most recently audited financial year.
Dual primary listings
Other companies may opt for a dual primary listing in Hong Kong or to convert a secondary listing to a primary listing, especially in the wake of new listing rules in Hong Kong that make it easier for overseas issuers. Those rules took effect Jan. 1.
Primary listings require companies to meet the requirements and pay the costs for each exchange on which they are listed. Secondary listings are commonly sought when two desired exchanges have different listing requirements.
"I believe the positive development in the negotiation of the Sino-U.S. regulators is not going to deter Chinese American Depository Receipts from dual primary listings in Hong Kong," said Eva Lee, head of Greater China equities at UBS Global Wealth Management's chief investment office. "They will [want to] seek protection against any risk of disclosure not satisfying the U.S. PCAOB's expectations."
Alibaba got the approval to change its listing status in Hong Kong to primary from secondary to broaden its investor base in China. Before the August PCAOB agreement, the e-commerce company faced heightened scrutiny as it was added to a list of U.S.-listed Chinese companies that would face delisting if they could not meet audit requirements within three years.
Benefits vs. costs
A dual primary listing offers companies access to the Stock Connect program, which provides a link between China's mainland markets and the Hong Kong stock exchange, expanding access for Chinese investors. The program also allows overseas investors to buy China A shares listed on the mainland.
"It is an attractive option for companies willing to jump through the extra hoops and expenses of a dual primary listing," said Running Point Capital's Schulman.
A dual primary listing is more costly, with more administrative-related expenses, and requires stricter reporting rules than a secondary listing.
A dual primary or secondary listing is a good option for companies that are concerned about the political tensions between the U.S. and China, as well as the ongoing cybersecurity regulations in China, said Ge Yang, a partner at DLA Piper. These listings also appeal to companies that do not have a state-owned enterprise background. China's regulators, including the Cyberspace Administration of China, require a cybersecurity review of all companies with over 1 million users that seek an initial public offering overseas.
"For companies that have a strong [state-owned enterprise] background, adhering to China's policies may be more of a priority," Yang said. "For TMT companies that have a large user base [and] carry important information and personal data, a secondary or dual-primary listing is the trend."
In August, PetroChina Co. Ltd., China Life Insurance Co. Ltd., China Petroleum & Chemical Corp., Sinopec Shanghai Petrochemical Co. Ltd. and Aluminum Corp. of China announced plans to voluntarily delist from U.S. exchanges due to business concerns.
Companies that do not meet the Hong Kong exchange's minimum requirements for a secondary or dual primary listing in terms of revenue, net profit or operating cash flow — such as cloud company Kingsoft Cloud Holdings Ltd., livestreaming platform HUYA Inc. and used car e-commerce service Uxin Ltd. — will stay listed in the U.S., according to Schulman.
Small- to mid-cap TMT companies without a sizeable internet platform will be less impacted by China's regulations and therefore are more likely to stay listed in the U.S., Yang said.