After a year of setbacks, Chinese stocks traded in New York and Hong Kong are regaining investor interest as the policy landscape becomes clearer
- The regulatory storm that decimated U.S.-listed Chinese stocks last year is winding down, with shares likely to recover lost ground in 2022
- By lowering the threshold for second listings, the Hong Kong Stock Exchange is becoming more attractive to mid-cap U.S.-listed Chinese companies.
By Tina Yip
Last year was a time international investors in Chinese stocks would rather forget. Hong Kong shares of Alibaba (9988.HK；BABA.US) and Tencent (0700.HK) yielded returns of negative 49% and 21%, respectively. New Oriental (EDU.US) and TAL Education Group (TAL.US) were even worse, with negative returns of 88.6% and 94.5% respectively.
Now the million-dollar question is how these stocks will fare in 2022. Will they continue their downward spirals, or could they bottom out and start trending up again? Some believe they are likely to rally, including Kenny Wen, a commentator at Everbright Sun Hung Kai Co. Ltd.
“I think things will pick up this year,” Wen said.
Last year will be remembered for the barrage of new Chinese regulation involving everything from anti-trust enforcement to personal information protection and the use of big data. But with much of the new policies now in place and being implemented, the government signaled in last-month’s Central Economic Work Conference that it won’t be enacting tougher policies anytime soon, Wen said.
“In addition, big Chinese companies such as Alibaba and Tencent are very cheap at the moment and the market is assessing how the policies are affecting their financial results,” he added. “These stocks might start to see things brighten up as early as in the second quarter of this year!”
Things were far different two years ago when U.S.-listed Chinese stocks were all the rage. But they were severely hammered last year by central government policies that caused their valuations, business performance and growth to suffer big setbacks. A 43.2% fall last year for the Nasdaq Golden Dragon China Index that tracks Chinese stocks listed in the U.S. summed up the story well.
Riding China’s rapid economic growth, dozens of Chinese enterprises rose to global prominence and made successful IPOs on the major U.S. stock exchanges over the last two decades, with international investors happily snapping up the shares.
But as tensions between China and the U.S. have ratcheted up, those same companies have faced tighter regulation at home and menacing clampdowns in the U.S. That’s scared off many of the same investors, who have started to pull out in droves.
The single most far-reaching act so far has been the “Holding Foreign Companies Accountable Act” adopted by the outgoing Trump administration a year ago. That law requires foreign companies to provide their audit work papers to the Public Company Accounting Oversight Board (PCAOB), which works closely with the U.S. securities regulator when fraud is suspected, by January 2024. Listed firms whose accountants are beyond the PCAOB’s reach for three consecutive years could see trading in their stocks suspended and be forced off U.S. stock markets.
From China’s perspective, Beijing worries that companies’ audit work papers might contain trade secrets and user data that could pose a national security risk if handed over to U.S. regulators. China’s own securities law also prohibits foreign regulators from conducting investigations and collecting evidence within China’s borders. In light of the situation, Beijing last year introduced a Data Security Law to restrict the flow of business data out of the country.
HK homecomings pick up pace
The dueling laws caught U.S.-listed Chinese companies in the crossfire, especially tech and internet firms whose business involved big data. Many felt compelled to come back to China and seek shelter in either Hong Kong or on mainland China’s A-shares stock markets. Last year alone, big names like Baidu (9888.HK；BIDU.US), Bilibili (9626.HK；BILI.US)，Trip.com (9961.HK；TCOM.US), Weibo (9898.HK；WB.US) and Autohome (2518.HK；ATHM.US) all made second listings in Hong Kong.
To welcome more of those U.S.-listed Chinese stocks, the Hong Kong Stock Exchange (0388.HK) lowered its own bar for such second listings. It said companies no longer need to come from innovative sectors to list with dual-class shares. It also reduced the minimum market value for listing to HK$3 billion ($245 million) five years after floatation, or HK$10 billion two years after floatation.
CITIC Securities believes the Hong Kong Stock Exchange offers a refuge for U.S.-listed Chinese stocks that could be forced out, and more companies will seek such second listings this year. The number of stocks qualified for such listings has increased to 77, up by 43 compared to the last time CITIC Securities calculated the number. It is believed that mid-cap companies like Missfresh (MF.US) and UP Fintech (TIGR.US) will float their shares in HK this year as well.
Another alternative is returning to the A-shares market. To make that easier, China has launched simpler IPO registration pilot programs for the Shanghai STAR Market and the Shenzhen Growth Enterprise Market, making second listings on the A-share market a more viable option.
Chinese investors have found it very hard to invest in U.S.-listed Chinese stocks in past decades as a result of the country’s strict controls for moving money across international borders. But listing in the A-shares market will make those companies immediately available to domestic investors, helping them to secure better valuations and raise more capital. The downside is such listings aren’t very visible to international investors, and domestically traded firms in general have difficulty raising their profile on the global stage.
Buying on the dip
While some U.S.-listed Chinese companies are returning home in the face a challenging global environment, other earlier-stage ones are still looking to venture out. Tech companies caught in middle of the China-U.S. tit-for-tat may be heading home, but companies with little or no sensitive data are still eyeing new U.S. listings.
The latter group includes wheelchair manufacturer Jin Medical (ZJYL.US), medical equipment maker Meihua International Medical Technologies (MHUA.US) and hotel operator ATour Group (ATAT.US), which are all actively seeking U.S. listings. Jin Medical was notable as the first Chinese company using the controversial variable interest entity (VIE) structure to apply for a U.S. listing since Didi’s (DIDI.US) own controversial decision to delist from the U.S. less than a year after going public.
2021 will undoubtedly go down as a year of trauma for U.S.-listed Chinese stocks. But investors expect more clarity surrounding Chinese policies this year and for valuations to rebound. Shanghai Securities believes Beijing’s regulatory blitz wasn’t aimed at stifling business giants, but rather was designed to facilitate the stable and healthy development of industries. Accordingly, tech and internet stocks should bottom out and start to stabilize as China undergoes a transition, and prospects for such companies remain sound.
It’s true that valuations for big Chinese tech companies have hit new lows, as demonstrated by meager price-to-earnings (P/E) ratios for Alibaba and Tencent of just 14 and 22, respectively. Some international investors have already swooped in to snap up these stocks at bargain prices after last year’s big declines.
Investors like Charlie Munger, business partner of Warren Buffett, and institutions like Hillhouse Capital Group and Bridgewater Associates have recently boosted their holdings in Alibaba. And legendary Chinese investor Duan Yongping has increased his holdings of Pinduoduo (PDD.US). Similarly, Perseverance Asset Management and Greenwoods Asset Management have purchased more shares of Kanzhun Ltd. (BZ.US) and KE Holdings (BEKE.US).
Given the nascent wave of renewed buying interest, it should come as no surprise that Dubravko Lakos-Bujas, head of global equity research at JPMorgan, shouted out in an interview last week: “The story of Chinese stocks is far from over; their chances to rebound … are great. We should get ready for their comeback!”
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