“Escape” NASDAQ – Chinese tech giant’s listing Plan B

After Alibaba’s successful second listing on the Hong Kong Stock Exchange, other Chinese technology companies have been foolish, and JD.com and NetEase have secretly filed their listing applications in Hong Kong. Luckin Coffee’s accounting fraud scandal has led Nasdaq to tighten listing rules further. At the same time, U.S. senators have crafted a bill that would force Chinese companies out of the market. None of this will allow Chinese technology companies to make contingency plans and not stay on U.S. exchanges.

Here’s a comprehensive analysis:

Baidu’s de-listing deliberations have culminated in recent rumours that Chinese technology companies are seeking to list on other exchanges outside the United States.

Although Baidu was quick to deny the claims as rumors, the Reuters report did not appear to be a catch. Baidu wants to boost its valuation by listing on exchanges closer to home, Reuters said, citing people familiar with the matter. In this view, Hong Kong is the choice.

Baidu, which landed on nasdaq in 2005, had a market capitalisation of just $38.1 billion as of Thursday’s close. One of the once “BAT” big three, Baidu has a market capitalisation of only 6.7 per cent of Alibaba’s $568.5bn and Tencent’s $526.1bn (in intraday trading) of 7.2 per cent. In addition to the traditional giants, Baidu’s market capitalisation is not as big as the United States, Ping Duo Duo and other rising star.

As Baidu’s CEO, Mr Li’s statement is more telling. Mr Li, who is currently attending two meetings in Beijing, said yesterday that if it was a good company, the listing options were actually very large and not limited to the United States.

Second listing tide in Hong Kong

Mr Ali took the lead, taking the lead in a second listing in Hong Kong in November, raising $11.2bn, making it the country’s biggest IPO since 2010. Ali’s second listing in Hong Kong is not so much a plan as a wish to complete.

Hong Kong has always been Ali’s preferred destination for listing, but the HONG Kong Stock Exchange’s “same-share rights” rules of the year did not allow Ali’s partnership system to force Ali to land on the NYSE in 2014, raising a record $25 billion. Mr Ma told a 2014 Hong Kong investor presentation that the company’s failure to list in Hong Kong was not a missed opportunity in Hong Kong, but a missed opportunity by Mr Ali.

Tech giantseeks second listing in Hong Kong

Ali’s successful secondary listing in Hong Kong opened the door for other mainland technology companies. Reuters reported in January that Baidu, Ctrip and NetEase had all held preliminary talks with the Hong Kong Stock Exchange on a second listing to build a group of investors closer to China.

NetEase plans to launch its Hong Kong IPO as soon as June, raising $1 billion to $2 billion, the Hong Kong Economic Daily reported this week. According to the Hong Kong Letter, JD.com will seek a Hong Kong listing hearing next week, if successful, as soon as early June, and list on June 18, raising about $3 billion.

Luckin fakes, U.S. hand-out restrictions

Luckin Coffee’s financial fraud scandal has sparked a U.S. move to restrict Chinese-listed companies. In fact, U.S. regulators were unhappy about not being able to access audit information from Chinese-owned companies.

This time, Luckin Coffee received a shock notice of de-listing from NASDAQ. Nasdaq cited the reason ingress that Luckin Coffee’s misrepresentation of sales raised public interest concerns and that it had not been disclosed to material information in the past.

Nasdaq’s de-listing notice surprised Luckin Coffee’s management. Luckin coffee executives may have thought they would be severely punished, but they didn’t expect to be directly ordered to go off the market. Luckin Coffee Chairman Lu Zhengyao responded that he was personally disappointed and sorry that nasdaq had not asked for the company to withdraw from the market. Luckin’s coffee plunged 36 percent after the resumption of trading on Wednesday and fell another 29 percent on Thursday.

Meanwhile, Nasdaq is tightening listing rules. The new listing rules will require companies in some countries, including China, to raise at least $25m, or at least a quarter of their post-IPO market value, at the time of IPO. Nasdaq will also require audit firms to ensure that their international subsidiaries comply with global standards. Nasdaq will also review the audit of the accounts of Chinese companies responsible for auditing promising IPOs. While the new rules do not explicitly mention Chinese companies, the move is largely due to concerns that some Chinese companies that are expected to go up for IPOs lack accounting transparency and have close ties to powerful insiders.

Then the U.S. Congress took action again. The U.S. Senate on Wednesday passed a bill to tighten regulation of foreign companies, the Securities Times reported. The bill, known as the Foreign Companies Accountability Act, prohibits any foreign company from complying with the audit requirements of the U.S. Public Company Accounting Oversight Board (PCAOB) for three consecutive years, barring the company’s securities from listing on U.S. stock exchanges. The bill would also require public companies to disclose whether they are owned or controlled by a foreign government.

These will no doubt worry Chinese listed companies. “We are really concerned about the continued tightening of government controls on Chinese-stock companies at the government level, and we are constantly looking at things that can be done, including, of course, secondary listings in places like Hong Kong,” Mr Li said in an interview. “

Three options

Amid deteriorating external conditions, Chinese tech giants are starting to draw up contingency plans to raise capital. The main body of the scheme is to seek a secondary listing on exchanges close to the Mainland, mainly in Hong Kong.

Investment banks working with Baidu are working on contingency plans for the company, including comparisons of listing locations, exit or potential timing of listings on another exchange, according to people familiar with the matter.

The investment banks’ proposals include: (1) to continue to list New York as the main listing site while seeking a second listing in Hong Kong this year; (2) to list in Hong Kong, to work with investors to raise the volume of shares to be sufficient to make Hong Kong a major listing location, and then to delist from NASDAQ if necessary; and (3) to privatise the company and then list in Hong Kong or the Mainland.

But people familiar with the matter said that without a foothold in another capital market, the exit from the U.S. would create huge liquidity headaches. Moreover, the window for secondary or re-listing narrows under the influence of the new corona pneumonia pandemic, the uncertainty of the trading environment and the layers of the US election year.

What impact will a de-listing have on investors?

So how will a company be affected if it suddenly delists? Simply put, the biggest impact is on share prices.

When a company is delisted, shareholders can retain their shares and retain their shareholder interest in the company. However, the cash value of these stocks may be almost zero.

Luckin coffee is a good example. Luckin Coffee has been suspended since April 7. On Wednesday, Luckin Coffee resumed trading, closing down 36 percent, leaving its share price at less than $3. By contrast, Luckin Coffee’s shareprice hit a high of $50 in January.

But the collapse in Luckin Coffee’s share price also reflects another side: investors are still looking to buy shares in the company. Investors have chosen to continue to hold shares in a delisted company, perhaps hoping that the company will one day be relisted to recover its falling share price.

Moreover, de-listing does not prevent the company’s stock from being traded, even though trading is not as convenient as it used to be. Shareholders can buy and sell shares in a delisted company through the otc, also known as the over-the-counter market. Such transactions lack a centralized market regulation.

Technically, stocks traded in OTC are still listed because companies are required to register with the U.S. Securities and Exchange Commission. However, otC stock trading registration requirements are not as stringent as the registration of listed companies on regular exchanges.

However, if a company goes bankrupt, its stock becomes worthless in almost all cases. The quick sell-off triggered by the de-listing will also hit investors hard. If the Senate bill is approved by the House and Trump into law, more than 200 companies currently listed on U.S. exchanges could be delisted, Bloomberg reported.