Caixin
Jun 10, 2020 09:30 AM
TECH TALK

Hong Kong Listings Win Beijing Brownie Points for Big Tech, But Wall Street Less Impressed

As the Covid-19 pandemic recedes, more routine matters are popping up these days, including a swelling wave of Hong Kong IPOs by big Chinese tech firms already listed in the U.S. Alibaba was a trailblazer when it became the first big tech name to make that move with a Hong Kong IPO in November.

More recently, Alibaba rival JD.com Inc. and gaming stalwart NetEase Inc. are making similar progress toward Hong Kong IPOs that are set to start trading this week and next.

The question of why these companies, many of them quite cash rich, are doing this has been raised and addressed numerous times before, though I’ll throw in a summary here for the uninitiated. But rather than spend too much time covering old ground, I thought I’d break some new terrain with a quick-and-dirty analysis on how Alibaba’s stock has fared since its landmark move.

I also did a little polling on whether this trend is likely to pick up speed and lead to a rush of similar new listings. And then there’s the more subdued doomsday question of whether this wave of second listings could set the stage for a future wave of privatizations by Chinese firms from an increasingly hostile regulatory environment in the U.S. as they seek a warmer reception in Hong Kong. But more on that later.

First, for the truly uninitiated, we’ll do a quick wrap of developments leading up to where we are now. Chinese tech companies began listing in the U.S. around two decades ago, and I can remember that within just a few years there was already talk of doing second listings in Hong Kong. But nothing ever came of that until recently.

Alibaba became a trailblazer when it decided to go ahead with such a second listing last year, motivated by changed Hong Kong rules that made such a listing possible and also the desire to be closer to its home China market. That listing raised about $11 billion that Alibaba didn’t really need in November, and more importantly provided a “proof of concept” that such dual listings were possible.

Fast forward to the present, where both JD.com and NetEase are close to launching their own Hong Kong IPOs, and speculation is bubbling that others could follow. NetEase is slightly ahead in the race, and on Sunday announced the pricing for its listing that will raise about $2.7 billion and make its trading debut on Thursday. JD.com is expected to finalize its own Hong Kong IPO pricing on Thursday, with its shares set to start trading on June 18.

Spotty scorecard

With all that background out of the way, let’s move on to a look at how Alibaba’s stock has fared since its November Hong Kong listing compared with the broader markets. Here I should add a small disclaimer that such comparisons may be slightly less interesting than usual due to the massive volatility in global stocks since November caused by the Covid-19 pandemic. Still, such an analysis could provide some insight on how these companies might do under their new dual-listed status.

Last year, Alibaba’s stock was on something of a tear, rising 42% from the start of the year through Nov. 26, the day its shares started trading in Hong Kong. That was well ahead of a 30% gain for the tech-heavy Nasdaq and 25% for the broader S&P 500 over the same period, not to mention trampling a 2.4% decline for Hong Kong’s Hang Seng Index during that time.

Between Nov. 26 and the start of this week, the picture became a little cloudier. Alibaba’s shares rose 12.8% during that time. That was well ahead of the S&P’s 1.7% rise over the period, and blew away a 7.9% decline for the Hang Seng. But it actually underperformed the most important benchmark, the Nasdaq, which rose 13.5% over that time.

So the message seems to be that at least initially, this new generation of dual-listed companies could take its cues from New York and not Hong Kong in terms of share price. The dual listing also seems to have taken some of the wind out of Alibaba’s sails in the U.S., where it was no longer the stellar outperformer in its post-Hong Kong days that it was pre-listing.

I’ve already touched on the reasons for making such second listings, which are heavily political and aimed at a sort of “giving back” to ordinary Chinese citizens who underpin these companies’ success and can now more easily buy their stocks in Hong Kong versus the less-accessible U.S.

A more interesting question arises in light of recent U.S. developments that some are saying could lead to Chinese companies being kicked off Wall Street if they fail to make audit records more accessible to U.S. regulators. I’ll be frank and say that I and most of my contacts seriously doubt this will happen, as there’s simply too much at stake for many of these firms that would need to spend huge sums to privatize from Wall Street.

Of course if hostility continues to heat up in the U.S., having a second listing in Hong Kong to fall back on would certainly be a helpful — albeit somewhat expensive — insurance policy. That said, a couple of my contacts who work with many of the companies that might consider making such a move told me they have yet to hear much serious talk among such firms on that front. “The larger ones may consider a dual listing to hedge their bets,” one of them said. “But for small and midsize companies, it just doesn’t make much sense.”

Contact reporter Doug Young (dougyoung@caixin.com)

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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