One question: what is the current situation of Chinese stocks?

Since the peak in 2021, Chinese stocks as a whole have continued to decline and lost to the world's major markets, and have been hit hard again in 2022. In March 2022, SCE added the first five companies to the "preliminary identification list" under the Foreign Company Accountability Act, triggering a panic sell-off. As of May 15, a total of 108 Chinese stocks had been added to the list, and another 23 had been transferred to the "identified list" for the fiscal year 2021. After a sharp correction since 2021, the overall valuation of the Chinese stock market has fallen to a low below twice the standard deviation of the long-term historical average, but the index profit expectation is still in the downward channel.

Chart 1: listed US-listed Chinese stocks have basically led the decline in the world since the beginning of 2022.

Chart 2: combing the performance of overseas Chinese stock market since 2021

Chart 3: comparison of the performance of major overseas Chinese stock indexes over a certain period of time

Chart 4: NASDAQ Golden Dragon Index earnings continue to decline

Figure 5: the forward 12-month price-to-earnings ratio of the US U.S. China Stock Index.

Figure 6: forward 12-month price-to-earnings ratio of the NASDAQ Golden Dragon Index

图Table 7: sorting out the valuation and profitability of US-listed Chinese stocks by industry

Second question: where are the regulatory negotiations between China and the US?

At present, the regulators of China and the United States have maintained good communication and made some positive progress, and are working to form a concrete cooperation plan. The new secrecy rules recently issued by the CSRC also provide the possibility for follow-up Sino-US audit regulatory cooperation. At the same time, Chinese regulators say they continue to support all kinds of companies to list overseas.

Figure 8: foreign Company Accountability Law and the Evolution of Sino-American Supervision

Chart 9: since March, overseas active funds have continuously flowed out of the Hong Kong stock market and the US-listed stock market, while southbound funds have continued to rise against the trend.

According to the chart 10:EPFR, there has been a great pressure on the outflow of overseas active funds since March, while passive funds have continued to flow against the trend.

Figure 11: us Chinese stocks with the top 60 by market capitalization

Third question: what is the choice and way out of Chinese stocks?

Given the major premise that China and the United States are expected to reach a certain degree of regulatory cooperation, the choice and way out of Chinese stocks in the future can be roughly divided into the following situations:

1) still unable to meet the regulatory requirements, such as state-owned enterprises or some enterprises, choose to delist

2) companies that do not need to be forced to delist can still go to Hong Kong for secondary listing or dual major listing

3) companies that do not meet the conditions for returning to Hong Kong will continue to trade in the United States. At present, 27 Chinese stocks have returned to Hong Kong stocks, and we expect 42 companies to meet the conditions for returning to Hong Kong stocks in the next 3-5 years.

Chart 12: the latest progress of regulatory cooperation between China and the United States

Figure 13: assuming that Chinese and US regulators reach a cooperation agreement, the future listing path of Chinese-listed stocks

Question 4: what are the considerations for choosing different regression paths?

At present, there are mainly two ways to return to Hong Kong stocks: secondary listing and main listing (privatization is no longer the mainstream because of the high cost). The choice of different paths mainly involves institutional constraints, cost differences, investment scope and other factors.

1) Institutional constraints: some companies, such as non-new economy companies with the same shares and different rights, are currently unable to return to Hong Kong stocks; at the same time, the threshold for secondary listing is lower than that for major listings.

2) cost difference: the secondary listing process is faster, the cost is lower, and the follow-up information disclosure requirements are also simpler, but it is necessary to ensure that the listing status of the main body is not damaged.

3) Investment scope: compared with the main listing, the secondary listing still can not be included in the investment scope of the Hong Kong Stock Connect.

Chart 14: since the reform of the listing system in 2018, 16 US Chinese stocks have been listed in Hong Kong for the second time.

Chart 15: so far, six US Chinese stocks have returned to Hong Kong stocks with dual major listings.

Chart 16:29 US Chinese-listed stocks or basically comply with the secondary listing rules of Hong Kong stocks; some high-quality head companies may choose dual major listing

Chart 17: if the listing history and market capitalization are slightly relaxed, another 13 companies may meet the requirements for secondary listing in Hong Kong in the next 3 to 5 years. Some quality head companies may choose dual major listings.

Question 5: will the exchange of shares between Hong Kong and the United States cause price difference?

Secondary listing and dual major listing of US stocks and Hong Kong stocks are fully convertible, fully priced, in theory, there is no discount at the time of exchange.However, it should be noted that the dual major listed companies bought through Hong Kong Stock Connect are held by Zhongdeng and cannot be converted into US stocks at present. If this scale continues to expand, do not rule out the impact of price differences.

Figure 18: an Analysis of the regression path of China-listed stocks

Figure 19: road map for overseas listed Greater China issuers to list in Hong Kong

Chart 20: Hong Kong dual major listing vs. Comparison of secondary listing

Chart 21: the share of listed Chinese stocks in Hong Kong is on the rise.

Chart 22: the share of turnover of BABA and JD.com on the HKEx has increased in the past year, but NetEase, Inc has remained basically unchanged.

Question 6: will the return of sovereignty exert pressure on the liquidity of Hong Kong stocks?

The possible liquidity impact of returning to Hong Kong stocks is mainly reflected in two aspects: new financing and investor leakage:

1) We estimate that the 42 Chinese stocks that are likely to return will raise an average of HK $28.8 billion a year in the next three years, which is equivalent to 9% of the IPO financing of Hong Kong stocks in 2021, which is not high. If the listing returns with the introduction of no new financing, the scale will be even smaller.

Figure 23: calculation of the scale of new fund-raising brought about by potential secondary listed companies

2) if enterprises are later forced to delist in the United States, some overseas investors who are subject to investment scope, investment vehicles and other constraints may not be able to directly convert their shares into Hong Kong stocks and be forced to reduce their holdings. For example, the ETF fund, which can only be included in US stocks, may have an average annual size of HK $12.6 billion.

Chart 24: assuming that the financing scale of non-secondary listing of Hong Kong stocks in the next three years is maintained on an average of nearly five years, the new financing demand for the return of US-listed stocks is not high on average.

Chart 25: even if Chinese stocks are listed in Hong Kong in 2022 and 2023, the new financing scale is still within a historically reasonable range.

Chart 26: the retail and undisclosed holdings of the top three Chinese stocks may be about $63 billion.

Chart 27: under the benchmark scenario, the loss by delisted investors may reach HK $12.6 billion (about 3 per cent of market capitalization) in the future.

Chart 28: although the overall scale of southbound funds is small, the transaction is active.

Figure 29: southbound capital overall preference for new economy targets

Q7: can it be included in the Hong Kong Stock Connect after returning to Hong Kong? If the future secondary listing is included in the Hong Kong Stock Connect, how much capital inflow may be brought?

According to the current rules, secondary listed companies are still unable to be included in the Hong Kong Stock Connect, while dual major listed companies can. We estimate that if secondary listed companies are allowed to be included in the Hong Kong Stock Connect in the future, it may theoretically bring a potential capital inflow of about HK $45 billion to the current 16 secondary listed companies.

Chart 30: rules and mechanisms related to the Shanghai-Shenzhen-Hong Kong Stock Connect

Chart 31: measurement of potential passive funds if secondary listed companies are included in the Hong Kong Stock Exchange eligible target

Q8: what will happen if Chinese stocks are forced to delist in the United States?

The situation varies from company to company:

The main results are as follows: 1) for the return of US-listed stocks through dual main listing, their main listing status in Hong Kong will not be affected and the impact will be minimal.

Chart 32: involuntary delisting rules of the New York Stock Exchange and the NASDAQ Stock Exchange

2) the listing status of secondary listed companies will be affected by the major listing places, but they can also apply for dual major listings, such as Bilibili Inc.

3) however, other companies that do not meet the conditions for return or conversion may have to choose privatization and delisting. From the investor's point of view, the holdings of the first two methods will not be greatly affected and can still be converted to Hong Kong stocks to continue trading, while investors of Chinese stocks who choose to be privatized can choose cash consideration or hold unlisted shares.