Kingsoft Cloud seeks to list in Hong Kong after being placed on a long list of Chinese companies that can be delisted in the U.S. under a law that requires the sharing of audit data

Key Takeaway:

  • Kingsoft Cloud has joined more than 100 companies that can be delisted in the U.S. amid an impasse between Washington and Beijing over a U.S. law that requires Chinese companies listed in the country to share audit records
  • The company’s stock has lost more than 95% of its value from its peak, hit by a regulatory crackdown at home and piling losses despite revenue growth

By Fai Pui

Kingsoft Cloud Holdings Ltd. (KC.US) has joined a growing list of Chinese companies seeking shelter in Hong Kong as it faces the risk of delisting in the U.S. It’s a sensible move but the question is if the money-losing company can receive any more investor love closer to home than it has halfway across the globe.

The company — Kingsoft Corp. (3888.HK)’s cloud-computing arm co-founded by Lei Jun, who created Xiaomi (1810.HK) — filed for an IPO in Hong Kong last Wednesday, with ICC, J.P. Morgan and Credit Sussie as co-sponsors.

Kingsoft Cloud is pivoting to Hong Kong after being placed on a list of more than 100 Chinese companies that can be thrown off U.S. stock exchanges under the Holding Foreign Companies Accountable Act (HFCAA). Under the law, which was passed in 2020, any company can be delisted if its auditors refuse to cooperate with investigations by the U.S. Securities and Exchange Commission (SEC). This means that nearly all U.S.-listed Chinese companies are at the risk of delisting because Chinese law bans auditors from sharing company information with foreign governments.

Erica Williams, head of the Public Company Accounting Oversight Board (PCAOB) said on Monday that the top U.S. audit watchdog must have unrestricted access to the audit records of U.S.-listed Chinese companies to let them maintain their listing status. But Chinese authorities continue to treat company audit data as state secrets and insist that all Chinese companies comply with the country’s data security rules

As talks between Beijing and Washington to resolve this issue go nowhere, a growing number of U.S.-listed Chinese companies have been rushing to Hong Kong to maintain access to an equity capital market. A company listed in the U.S. can just go private first before going for an IPO in Hong Kong, but this route requires approval from investors and more financial resources than seeking a second listing while staying on an exchange.

Just this year, several U.S.-listed Chinese companies — Zai Lab (ZLAB.US; 9688.HK), KE Holdings (BEKE.US; 2423.HK), Zhihu (ZH.US; 2390.HK), OneConnect (OCFT.US; 6638.HK), Tuya (TUYA.US; 2391.HK) and Miniso (MNSO.US; 9896.HK) — have completed IPOs in Hong Kong.

Kingsoft Cloud went public in New York in 2020 in an IPO where it sold its shares at $17 each. And its stock was worth more than $70 early last year. But since then, it has been on a steep downward spiral, losing more than 95% of its value from its peak.

Piling Losses

Investors have sold off Kingsoft Cloud shares for good reasons.

Firstly, like the rest of the technology sector in China, the company has been hit by a harsh regulatory crackdown. On top of that, the company is struggling to turn a profit as it faces an uphill battle to gain market share. It accounts for just about 3% in China’s cloud-computing market, which is dominated by Alibaba, Huawei, Tencent and Baidu. The four titans controlled more than 80% of the market last year, according to IDC.

Kingsoft Cloud’s annual revenue more than doubled to about 9 billion yuan ($1.3 billion) last year from 2019 but its losses have been piling up as well, according to its prospectus for the Hong Kong IPO.

One problem with Kingsoft Cloud is that it’s reliant on a handful of clients, including Xiaomi, too heavily for revenue generation. At the end of last year, the company had nearly 8,000 clients spanning various industries. But its top five customers still account for more than half of its revenue.

Kingsoft Cloud says it wants to diversify its client base. For one, it is looking to step up cooperation with  ByteDance, the owner of TikTok, and Meituan (3690.HK), among other tech companies. Kingsoft Cloud also aims to refine its service portfolio.

The company says it will manage costs better to improve its operational efficiency as well. But this may be easier said that done, given that it also needs to continue to ramp up spending for growth and product development. This means profit will probably remain elusive for Kingsoft in the foreseeable future.

Hong Kong can provide Kingsoft Cloud with a shield from the fallout from U.S.-China politics. But whether the company’s stock can fare any better in the city in large part will depend on its ability to chart a path toward profitability.

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