Since the second half of 2021, Chinese stocks have been in the doldrums under the changing regulatory situation at home and abroad. On March 10 this year, under the negative influence of the Foreign Company Accountability Law, it triggered a certain degree of irrational panic in the market, resulting in a collective collapse of Chinese stocks.

In the face of the depression of Chinese-listed stocks, the market point of view is that investors may urgently need to place their hopes on a relatively rational "Chinese-listed" market without politicized securities regulation and chasing value investment. At present, Hong Kong stocks have an investment environment conducive to the return of Chinese stocks, which is the most ideal platform for the secondary listing of Chinese stocks.

From the perspective of the internal environment, the HKEx began to implement the reform of the listing system in 2018, which allows secondary listing of new economy enterprises with different rights structures of the same shares, biotech enterprises that have not yet made profits, and eligible companies, so as to create an ecosystem for development and investment for new economy companies.

Starting from 2022, the HKEx has once again updated the system for overseas listed companies to list in Hong Kong, further lowering the standards for secondary listing in Hong Kong, including: listed companies are mainly oriented to companies with the same share structure and business focus on Greater China, and there is no need to prove that they are "innovative enterprises" and the threshold for market capitalization has been lowered.

At present, there are four ways for Chinese stocks to return to Hong Kong for listing, which are mainly divided into: 1) privatization and delisting before coming to Hong Kong to apply for listing; 2) major listing in Hong Kong (dual listing); 3) secondary listing 4) introduction listing.

Due to the high cost of privatization and delisting, and the uncertainty of re-listing after delisting, we focus on the more mainstream dual listing, secondary listing and introduction listing.

Basic profile comparison

1. Dual listing

Dual listing (dual primary listing) means that both capital markets are listed in the first place. In the case of listing in the United States market, listing in the Hong Kong market in accordance with the rules of the local market, the rules to be observed are exactly the same as the requirements of the companies that have made initial public offerings in Hong Kong, and the share prices of the stocks in the two markets are relatively independent. There may be a price difference.

BeiGene, Ltd. stock price chart, market source: Futu Niuniu

BeiGene, Ltd. has been listed in many places. In February 2016, the company landed on NASDAQ in the United States and raised US $182 million; on July 29, 2018, it dual listed in Hong Kong, issuing a total of 65.6 million common shares, accounting for 8.55% of the expanded share capital, and finally raised US $902 million.

two。 Secondary listing

Secondary listing (secondary listing) means that companies list the same type of stocks in two places and realize the cross-market circulation of shares through international custodian banks and securities brokers. This way mainly exists in the form of depositary receipts (Depository Receipts, referred to as DR).

In this mode of issuance, banks first buy a certain amount of shares of foreign companies and trust them all in the bank, and then the banks package the shares together to sell securities that represent this basket of stocks, which in the United States are called ADR.

If the company is re-listed as a financing Dr, the underlying shares will come from the company's newly issued common shares. In terms of pricing, the corresponding DR is converted according to the market price of the company in the original market on the pricing day, and a price is determined by the agreement between the issuer and the underwriter, which is also the secondary listing method chosen by most Chinese stocks such as BABA, Baidu, Inc., NetEase, Inc and so on.

3. Introduction to listing

According to HKEx documents, the form of introduction (introduction) is the way in which issued securities apply for listing. This approach does not require sales arrangements as there are already a considerable number of securities seeking listing and are widely held, so it can be inferred that they will have sufficient market liquidity after listing.

Generally speaking, the rules for introducing listing and issuing new shares are the same. The difference is that shares listed in the form of introduction are issued shares of the company, so the company will not issue new shares or raise new funds.

On March 10 this year, NIO Inc. officially landed on the Hong Kong Stock Exchange in the form of an introduction to listing, and the shares were traded in units of 10 Class A common shares per hand. the opening price on the first day was HK $160. the total market capitalization on that day was about HK $267 billion, which, based on the overnight closing price of US stocks, was about 0.97% higher than the opening price of Hong Kong stocks.

Liquidity comparison

1. Dual listing

Under normal circumstances, dual-listed stocks can be circulated across the market, and the specific requirements and conversion procedures are determined according to the company's prospectus. Zhihu Inc. stated in his prospectus that after the listing of Class An ordinary shares on the Hong Kong Stock Exchange, Class An ordinary shares registered with the Hong Kong share registrar will be convertible into American depositary shares, and some American depositary shares can also be converted into Class An ordinary shares.

two。 Introduction to listing

According to the previous introduction of listing and landing in Hong Kong, new shares issued to introduce the listing can support cross-market circulation, but the specific requirements and conversion process also need to be determined according to the company's prospectus.

3. Secondary listing

The ADR (American Depositary receipts) issued by Chinese stocks and Hong Kong stocks are fully convertible so that the prices of secondary listed stocks in Hong Kong market are closely linked to those in the United States market. As the shares of the two places are fully convertible and the Hong Kong dollar is pegged to the US dollar, the price difference between the two places is basically negligible after some neglected taxes and fees, as well as friction between trading time and cost.

What other companies are likely to return?

At present, under the situation of strict supervision of Chinese stocks, the HKEx is also continuing to broaden the way of listing to meet the resurgence of Chinese stocks. In mid-November last year, the HKEx issued the consultation Summary on the listing system of overseas issuers, which further optimized and simplified the listing system of overseas issuers and lowered the threshold for secondary listing. The revised listing rules came into effect on January 1 this year.

Under the new rules, Greater China issuers without different voting rights structures can apply for secondary listing without proof that they are innovative industrial companies, and the minimum market value at the time of listing is lower than the existing requirements. The requirement for secondary listing of Hong Kong shares is lowered to:

1. Has a market capitalization of HK $3 billion and has a good compliance record for 5 full fiscal years; or

2. It has a market capitalization of HK $10 billion and has a good compliance record for two full fiscal years, and the new deal removes the industry requirements for companies with non-WVR structures.

Exempted Greater China issuers and non-Greater China issuers who are eligible for secondary listing may choose to be dual primary listings and retain their existing different voting structures and / or variable interest entity (VIE) structures.

According to a research report by brokerage analysts, based on the revision of the relevant "listing rules" of the Hong Kong Stock Exchange and the new guidance materials, it is expected that the trend of overseas listed Chinese stocks returning to Hong Kong will gradually spread from large technology Internet giants to small and medium-sized companies. At the same time, the industry distribution of listed companies will also be further diversified.

As of April 26, 2022, nearly 26 companies are expected to meet the conditions for secondary listing or dual major listing of Hong Kong stocks in the near future.

In addition, HKEx plans to make further changes to its listing rules this year to welcome the return of more US-listed stocks. According to the China Fund Daily, the listing Committee said in its 2021 annual report that in terms of prospectuses and listing processes, this year's focus will include a review of the IPO eligibility requirements and "whether issuers with different voting rights are suitable for listing on the Hong Kong Stock Exchange".

UBS also said in its report that the Hong Kong Stock Exchange and regulators were discussing the possibility of relaxing the listing rules for "technological innovation" companies that failed earnings tests. If the final requirements are similar to those applicable to biotech companies (with a market capitalization of more than HK $1.5 billion), about 41 new Chinese ADR companies are expected to be eligible to list in Hong Kong.

Will the HKEx usher in more return targets for US-listed stocks in the future? Let's wait and see.