Skip To Content

Why Delisting from US Exchanges Is the Next Big Opportunity for Chinese Firms

by Montieth Illingworth

More and more Chinese companies that are stuck between competing regulators will delist from US exchanges, especially following the recent announcement by Didi Chuxing of its departure from the New York Stock Exchange.

However, the focus should not be on who will prevail in the dispute between Chinese and American authorities over public company compliance with disclosure standards and financial audits.

Short of achieving a harmonised approach to transnational audit regulation—a sensible thing to do but not likely in the foreseeable future, given the political divide—we can expect the dispute to remain unresolved for some time.

For every financial dislocation, we can rely on the market’s “invisible hand” for a solution. In its pursuit of returns, freely moving capital has a way of finding a home. The regulatory dispute will not derail all institutional global investor interest in and commitment to Chinese-listed companies.

Rather, many of the more sophisticated cross-border investors know that these companies are good long-term holdings. This is particularly so as they represent sectors with significant growth potential, such as electric vehicles and e-commerce, that promise expansion into new global markets.

As these departing companies list in Hong Kong, the money is likely to follow. When they listed in the United States, investors from Britain and Europe took sizeable positions.

Ultimately, the management of these companies will see that providing investors with transparency and accountability is not just the price of expanding equity participation. It is also central to the corporate growth journey and has numerous long-term benefits for all stakeholders.

The current generation of listed companies started with Alibaba’s US$25 billion initial US public offering in 2014. Since then, 282 Chinese companies had listed on US exchanges and generated US$1.7 trillion of market capitalisation as of October, just a few percentage points of the entire market capitalisation of the exchange but still noteworthy.

This year alone, 37 additional Chinese companies have listed in the US. With each passing day, though, those valuations are dropping, as Chinese companies are delisting.

Part of that drop is driven by the fickle nature of US capital markets. Between hedge funds that will bail on a stock in the blink of an eye, quantitative program trading algorithms, and day traders, any form of headline risk—let alone a single miss on an earnings estimate—can translate into a price plunge.

Enhancing direct communication with international investors, in the same way these companies do for their local shareholders, will also be appreciated by global shareholders. These practices have been demonstrated by organisations like Baidu and BeiGene, which have built an investor relations infrastructure that engages with investors and explains their earnings ups and downs.

Many others do not realise how important communications is with foreign shareholders and analysts to help them understand their overarching strategies, let alone earnings misses. Most of these companies do not have a physical presence in the US, and instead, focus their communications within their home region.

In the end, that might be seen as a miscalculation. So, too, might be overlooking a deadline for a required Securities and Exchange Commission filing, which more than just regulators will notice.

Alibaba, which owns the South China Morning Post, has 44 US financial analysts covering its stock, almost the same number as Amazon and more than Microsoft. That is a lot of eyeballs scrutinising every disclosure, or lack of disclosure, every day of the year.

It is also a lot of questions that management needs to answer or risk paying the price for failing to do so in a clear, consistent way. Wherever a company decides to list in the world, analysts will follow.

As the migration to the Hong Kong exchange builds momentum, many of the more sophisticated global investors—especially those who understand emerging markets—will follow. Their list of questions and, therefore, the need for management to revisit the issue of being transparent, will do likewise.

For those companies who today have and want to maintain a dual listing in Hong Kong and the US—such as JD.com, Baidu, NetEase, and Weibo—the opportunity for obtaining investor commitment for the long term is even greater.

Here again, it means embracing transparency and realising that, while governments will always disagree about something, investors and company management can usually find common ground. That is, after all, in the best interests of all concerned.

Montieth Illingworth is CEO and global managing partner at Montieth & Company and co-chairman of Montieth SPRG.

This article was originally published in South China Morning Post.

Share