On July 8, 2020, for five consecutive trading days, the trading volume of A shares exceeded 1 trillion yuan. The discussion of "here comes the bull market" is once again flooded with Chinese media and social networks. Prev officially entered a technical bull market on July 6.

Like the last A-share bull market, Internet giants are still out of the reach of retail investors. Although these companies are already the glue of the Chinese economy, they are also the most dynamic part of the Chinese economy. As of the first quarter of 2020, the technology stock market accounted for only 18 per cent of all A shares, much lower than Hong Kong stocks (28 per cent) and US stocks (32 per cent).

Most of the largest Chinese Internet companies are in Hong Kong.

The top five Internet companies in China by market capitalization are Tencent ($620.6 billion), BABA ($615 billion), Meituan ($139 billion), Pinduoduo ($109 billion) and JD.com ($95.8 billion). Pinduoduo is the only company whose shares are not traded on the Hong Kong Stock Exchange. Pinduoduo, who listed in the US in July 2018, will soon meet all the main conditions for a secondary listing in Hong Kong.

There are historical reasons why Chinese Internet companies are mainly listed abroad. Shang Fulin, the fifth chairman of the China Securities Regulatory Commission, once said that the early positioning of China's stock market was to "serve the difficulties of state-owned enterprises" and that it was not the turn for emerging technology companies to go public. Due to profit, equity and other restrictions, Chinese technology companies have long been the first choice to list in the United States.

As the Hong Kong Stock Exchange began to reform in 2018, a large number of newly listed Chinese Internet companies chose Hong Kong stocks. Some companies that have already listed in the United States have also made secondary offerings in Hong Kong.

Coupled with the rapid cooling of Sino-US relations, the US Senate passed the Foreign Company Accountability Act in May 2020, leading to the risk that Chinese companies listed in the US could be forcibly delisted. More Chinese companies that have already listed in the United States are also considering secondary listings in markets closer to their users.

BABA started last year, and NetEase, Inc and JD.com were listed on the Hong Kong Stock Exchange in June, and their share prices are now higher than their offering prices. Trip.com has discussed a secondary listing in Hong Kong with two investment banks, it was confirmed from two people familiar with the matter. Robin Li also said when attending the two sessions that Baidu, Inc. was considering a secondary listing in Hong Kong.

The secondary listing of Chinese and Hong Kong stocks in Hong Kong on the one hand is a microcosm of the changes in Sino-US relations, on the other hand, it also reflects the changes in Hong Kong.

This year happens to be the 30th year for Chinese companies to enter the Hong Kong stock market. In 1990, Citic bought a stake in Taifu, a shell company listed on the Hong Kong Stock Exchange, brokered by Li Ka-shing and Yung Zhijian, and changed its name to Citic Pacific to trade on the Hong Kong Stock Exchange the following year.

State-owned enterprises were once the representatives of Chinese capital on the Hong Kong Stock Exchange. Tsing Tao Beer, Sinopec, brilliance and the three major operators have all raised capital in Hong Kong for the early stage of state-owned enterprise reform. Ten years after the reunification, Chinese shares accounted for half of the turnover on the Hong Kong Stock Exchange.

Thirty years later, state-owned enterprises gradually left the market. At the beginning of 2020, China Agricultural Holdings, wind power company Huaneng New Energy, commercial group Dachanghong Holdings, and aerospace company AVIC were privatized and delisted one after another, mostly on the grounds that their own value was undervalued.

At the same time, the market capitalization of the Chinese Internet giants in the HKEx, such as Tencent, BABA and Meituan, have repeatedly reached record highs. The turmoil has not affected the market's popularity for them. This provides confidence for the return of more Chinese Internet companies.

It is a fait accompli that more important Chinese companies will list in Hong Kong. We sorted out 20 questions to understand this trend.

1. How many Chinese stocks are eligible for secondary listing in Hong Kong?

The HKEx has several core requirements for the secondary listing of Chinese stocks in Hong Kong: it needs to be an innovative company with a market capitalization of more than HK $40 billion or more than HK $10 billion and annual revenue of more than HK $1 billion; there must be two fiscal years of listing on the New York Stock Exchange, NASDAQ or London Stock Exchange.

According to China International Capital Corporation's statistics on February 18, 2020, there are a total of 234 Chinese stocks listed in the United States, with a total market capitalization of 1.2 trillion US dollars. According to the statistics of a Goldman Sachs Group research report, at least 20 Chinese stocks meet the requirements of secondary listing; if the HKEx relaxes the listing time and the company's shareholders have different rights of the same shares in the future, 38 Chinese stocks meet the market value requirements of secondary listing.

The research report of Jefferies, an investment bank, on May 27, 2020 estimated that the secondary listing of US-listed Chinese stocks in Hong Kong could bring the HKEx a market capitalization of US $557 billion, equivalent to 12 per cent of the current total market capitalization of Hong Kong stocks. Together with BABA and JD.com, who have returned to Hong Kong for secondary listing, the total market capitalization has exceeded US $1 trillion.

At present, the HKEx does not allow company shareholders to have different rights in the same shares, but only individual shareholders are allowed to have different rights in the same shares. However, many Chinese stocks, such as Futu, iQIYI, Inc. and Weibo Corp, have shareholders with the same shares and different rights, so they cannot be re-listed in Hong Kong at present. The HKEx is currently considering liberalizing the different rights of the company's shareholders. Similarly, other secondary listing thresholds such as listing for eight quarters are also likely to be relaxed.

two。 What is secondary listing? What's the difference between going public for the first time?

For Chinese stocks that have been listed on a stock exchange outside the HKEx, the HKEx regards the original stock exchange as the place where it listed for the first time. The HKEx explained on its website that many of HKEx's listing rules can be exempted because these companies have met the listing rules of the place where they are listed for the first time.

For example, you can continue to use American accounting standards GAAP instead of international accounting standards IFRS or Hong Kong accounting standards HKFRS. Chinese stocks listed for the first time no later than December 15, 2017, the day the HKEx first announced the reform plan, will receive more exemptions from listing rules for secondary listings in Hong Kong, such as looser rules on different rights of the same shares and the VIE structure.

Chinese stocks listed outside Hong Kong can also seek dual initial public offerings (dual primary listing) in Hong Kong, with both the Hong Kong Stock Exchange and the non-Hong Kong stock exchange as places for initial listings. Dual initial public offerings require compliance with almost all listing rules in both places at the same time.

HKEx concluded in March 2020 that applying for a secondary listing in Hong Kong was "simpler and more straightforward" than an initial listing. Jindu Law firm concluded that BABA, NetEase, Inc and JD.com completed the project in about three to five months until the final listing.

If the global trading focus of secondary listed Chinese stocks in Hong Kong shifts to Hong Kong (defined by the HKEx as more than 55% of the global stock trading volume in a financial year takes place on the HKEx), the HKEx will automatically regard it as a first listing in Hong Kong. rather than a secondary listing-the rule exemption for secondary listing will be automatically revoked. Once this happens, the US-listed stock will have a transitional period of one year, during which it must meet the listing rules of the company's first listing, otherwise it will face the risk of being forced to be delisted.

3. Why did Chinese stocks return to Hong Kong for secondary listing at the end of 2019?

When BABA initially planned to list, the first choice was Hong Kong, but because the HKEx did not allow different rights of the same shares at that time, he had to turn to the United States.

BABA's American IPO finally became the largest IPO in history at that time. In August 2014, the HKEx issued a "concept paper on different voting rights structures" after the loss of BABA to consult all parties, but in the end, it did not allow the same shares to have different rights, and the reform ran aground. Subsequently, the Shanghai-Hong Kong Stock Connect was launched on November 17, 2014, and the Shenzhen-Hong Kong Stock Connect on December 5, 2016.

On April 30, 2018, the HKEx finally allowed the same shares to have different rights and allowed Chinese stocks to be re-listed in Hong Kong-the HKEx did not allow Chinese companies to list in Hong Kong (secondary listing) until April 30, 2018.

4. Why did Hong Kong once ban the secondary listing of Chinese companies?

The Joint Policy statement (Joint Policy Statement), jointly issued by the HKEx and the SFC in September 2013, allows secondary listings of companies outside Hong Kong, but explicitly prohibits secondary listings of Chinese companies in Hong Kong.

The HKEx's rule is seen as an attempt to prevent Chinese companies from bypassing the more stringent rules governing initial listings on the HKEx and opting for secondary listings in Hong Kong. Huang Yiyu, a partner at King & du Law firm, analyzed to later LatePost that allowing Chinese companies to re-list in Hong Kong is not in line with the traditional "concept" of the HKEx.

Before April 30, 2018, companies with different rights of the same shares cannot be listed in Hong Kong, and many US-listed stocks have different rights of the same shares. Therefore, even if the HKEx allows Chinese stocks to be listed again before April 30, 2018, the same shares with different rights will not meet the requirements.

5. The HKEx changed the rules on April 30, 2018. Why did the first US-listed company (BABA) not list again in Hong Kong until November 2019?

It will take some time for US-listed US-listed Chinese stocks to understand HKEx's new rules, including communication with HKEx and investment banks.

In addition, the protest movement that broke out in Hong Kong in mid-2019 interfered with the operation of Hong Kong's financial markets. The protest movement forced BABA to postpone plans for a secondary listing, Reuters reported.

6. It is reported that catering enterprises are also going to Hong Kong for secondary listing, not only innovative companies?

HKEx considers that two of the following four items are considered innovative companies:

(1) it can be proved that the success of the company depends on new technology, innovation or new business model.

(2) R & D makes a significant contribution to the expected value of the company, and is an important activity and expense of the company.

(3) to prove that the company's success is due to its unique characteristics or intellectual property rights.

(4) the market value or intangible assets of the company is much higher than that of tangible assets.

It can be seen that the HKEx has a broad definition of innovative companies, and the HKEx also clearly points out in the guidelines that the HKEx reserves discretion over what constitutes an innovative company. It is not subject to the above conditions-that is, companies that do not meet the above conditions may also approve listing, while companies that meet the above conditions may also be rejected by the HKEx. According to Bloomberg, Yum China has also applied for a secondary listing in Hong Kong on the advice of the investment bank-Yum China obviously believes that he also meets the definition of an innovative company.

7. Can A-share companies be re-listed in Hong Kong?

Because the HKEx requires that Chinese companies with secondary listings must first be listed on the NASDAQ, New York Stock Exchange or London Stock Exchange, Chinese companies listed only on the Shanghai or Shenzhen stock exchanges do not comply with the regulations.

8. What is the specific impact of the US Foreign Corporate Accountability Act on Chinese companies in the United States?

Since the outbreak of the Sino-US trade war, Sino-US relations have been at a low ebb. After the lucky fraud scandal, the US Congress also paid attention to the fact that the US regulatory agency PCAOB could not inspect the audit manuscripts of Chinese companies for a long time.

After the Enron fraud scandal broke out, the US Congress passed the Sarbanes-Oxley Act (Sarbanes-Oxley Act) in 2002, establishing PCAOB. PCAOB is responsible for supervising the accounting firms of listed companies in the United States, including reviewing audit papers. However, the China Securities Regulatory Commission, the State Administration of Secrets and the State Archives Administration issued regulations on October 20, 2009 to restrict overseas regulators from conducting on-site inspections. There are similar restrictions in the Securities Law.

According to PCAOB, as of April 1, 2020, the PCAOB of 276 foreign companies listed in the US could not be inspected, of which 89 per cent were Chinese mainland and Hong Kong companies, and the rest were from France and Belgium.

On May 20, 2020, the U.S. Senate unanimously passed the Foreign Corporate Accountability Act (Holding Foreign Companies Accountable Act), which stipulates that companies that have not been subject to PCAOB inspection for three consecutive years since the bill came into effect will be forced to delist.

The bill was submitted to the Senate committee as early as March 2019, but the legislative process accelerated after the fraud scandal broke out in April 2020. A senior investment banker working in Hong Kong analyzed to LatePost later that given that only a few countries, such as China, do not cooperate with PCAOB inspection, the US "will not give in" on this issue.

The bill still needs to be approved by the House of Representatives before it can take effect. The bill may still change before it finally takes effect, but if the bill takes effect in its current form and the Chinese and US governments fail to reach an agreement to review the audit draft within three years, US-listed US-listed Chinese stocks will be at risk of being forcibly delisted. This risk is clearly mentioned in the prospectus of NetEase, Inc and JD.com.

9. Apart from avoiding the risk of being forced to delist in the United States, what other reasons do Chinese companies have to return to Hong Kong?

Although Hong Kong, like New York, is an international financial centre with investors from all over the world, investors from Hong Kong and other parts of Asia still play a role. And because Hong Kong and Asian investors know more about Chinese stocks than Western investors, local preferences (home bias) and the convenience of local investment will give Chinese stocks listed in Hong Kong a higher market capitalization.

Secondary listing in Hong Kong can also meet the financing needs of US-listed companies.

At the same time, listing in Hong Kong and New York also allows US-listed stocks to trade almost throughout the day.

10. Will Chinese unicorns still be listed in the United States?

The requirements for listing in the United States are relatively lenient than those in Hong Kong. The idea of securities regulation in the United States is that as long as the disclosure is proper, the regulation itself does not impose too many restrictions. The HKEx pays more attention to the protection of small investors. For example, the HKEx restricts the chairman of the board of directors who have violated the criminal law, while the United States does not have such a restriction; the HKEx generally requires that the VIE structure be used only when necessary, but there is no such restriction in the United States; the HKEx does not allow shareholders of companies to have different rights in the same shares, but the United States allows it, and so on.

Therefore, many Chinese technology companies that do not meet the requirements for listing in Hong Kong will still choose to list in the United States. Tencent Music had to go public in the United States because Tencent, as a shareholder of the company, wanted to hold super voting rights.

In addition to the differences in regulation between Hong Kong and the United States, there are other factors involved in the choice of listing sites for Chinese companies. For example, gay dating platform Blued may prefer the United States for cultural reasons; Wu Biwei, president of Fortune Financial and Corporate Services, said that the original listing of Fortune chose the United States, in part because US stocks have already listed on the target companies, such as Interactive Brokers and Charles Schwab Corp (Charles Schwab).

It is understood that Chinese new car manufacturer Li Auto Inc. has started to go public, and XPeng Inc. is actively preparing for listing. The first choice for both companies is the United States, "because listing in the United States is the fastest," said one investment banker.

11. Why don't Chinese stocks go back to A shares for secondary listing?

Before the release of document No. 21 of the State Council on March 30, 2018 (notice of the General Office of the State Council transmitting some opinions of the Securities Regulatory Commission on pilot issuance of stocks or Depositary receipts by innovative Enterprises), red-chip companies listed on the mainland need to dismantle the red-chip structure, and for Chinese-listed stocks, they need to be delisted first. Due to the tedious delisting steps and the uncertainty of return, only a small number of Chinese stocks such as 360 return to A shares in this way.

Article 21 of the State Council stipulates that Chinese stocks with a market capitalization of no less than 200 billion yuan ($28.6 billion) can be dual-listed on the mainland, and allow companies with different rights and losses to list. For VIE structure companies, the State Council document No. 21 also requires regulators to "handle prudently in accordance with the law."

Although document No. 21 of the State Council has opened the door for Chinese-listed stocks to return to dual listing of A-shares, the requirement for a market capitalization of 200 billion RMB is still high (due to the recent market capitalization of Tencent Music, Trip.com and Futu are not qualified); the uncertainty of the audit of VIE structure is very high. XIAOMI had planned to list both Hong Kong and A-shares in 2018, but XIAOMI finally abandoned the mainland listing after the China Securities Regulatory Commission issued 84 questions to XIAOMI.

Science and Technology Innovation Board, who opened trading on July 22, 2019, made several breakthroughs-explicitly allowing different ownership structures of the same share and not requiring profits. The announcement No. 26 of the CSRC on April 30, 2020 ("announcement on the relevant arrangements for the listing of innovative pilot red chip enterprises in China") will also "have independent research and development, international leading technology, and strong scientific and technological innovation capability." the threshold for the dual listing market value of Chinese-listed stocks which is in a relatively dominant position in the same industry competition has been reduced to 20 billion yuan.

On the same day, the board of directors of Semiconductor Manufacturing International Corporation, a Chinese-listed company with red chip structure, adopted a resolution to apply for listing in Science and Technology Innovation Board.

CSRC notice No. 26 stipulates that VIE-structured companies must be approved by the China Securities Regulatory Commission before listing, and consult the industry competent department of the State Council, the National Development and Reform Commission and the Ministry of Commerce. As the Chinese government has been very cautious about the listing of VIE structure companies for a long time, so far, there is still no VIE structure company in A shares, so there is no precedent for Chinese stocks that want to return to A shares for secondary listing.

twelve。 What is the red chip structure? Why use the red chip architecture?

Red chips (red chip) refer to Chinese companies that are listed on the market, that is, the parent company is overseas, but their business is concentrated in Chinese mainland, which is named after the red color of the Chinese flag. Similarly, the red chip structure refers to Chinese companies whose parent companies are overseas, whether listed or not. Red chip architecture can be divided into direct shareholding architecture and VIE architecture (also known as protocol control).

In the early 2000s, Chinese mainland's venture capital and private equity market was just in its infancy, making it difficult for many start-up technology companies to obtain financing in China. Due to the strict control of Chinese mainland's capital account, it is very difficult for foreign investors to transfer funds out of the country, and startups that want to obtain overseas capital often need to raise funds through foreign entities. Putting the parent company abroad can also enjoy many regulatory advantages, such as the shareholding ratio of unlisted companies and the confidentiality of shareholder identity. Chinese stocks and China's unicorns are basically red-chip structures.

The Chinese government restricts or forbids foreign investment (including pure foreign investment and Sino-foreign joint ventures) to enter many domestic industries, so the VIE structure in the red-chip structure has become the choice of many Chinese technology companies.

13. Can Chinese stocks that return to Hong Kong for secondary listing get the money from A-share investors directly?

The Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect (collectively known as the Hong Kong Stock Connect) make it relatively easy for A-share investors to invest in Hong Kong-listed companies.

Before BABA's listing, the Shanghai Stock Exchange, Shenzhen Stock Exchange and Hong Kong Stock Exchange reached an agreement to exclude secondary listed companies with different rights of the same shares from the Hong Kong Stock Exchange, but HKEx proposed to the China Securities Regulatory Commission to relax the restriction, according to Bloomberg and China Business News. According to the two media reports, if secondary listed companies with different rights of the same shares are included in the Hong Kong Stock Connect, the competitiveness of the Shanghai and Shenzhen stock exchanges will be weakened, making it more difficult to attract Chinese stocks to return to A shares.

BABA pointed out in his prospectus that if the shares cannot join the Hong Kong Stock Exchange, it will affect mainland investors' trading of BABA shares, which "may limit the liquidity of the company's shares traded on the Hong Kong Stock Exchange."

According to HKEx data on June 26, 2020, Hong Kong Stock Connect investors own 6.44 per cent of XIAOMI, 4.43 per cent of Meituan, 2.85 per cent of Tencent and 25.26 per cent of Jinshan.

On October 28, 2019, Hong Kong Stock Connect allowed companies with different rights of the same shares to join. According to the analysis of Gao Sheng Research News, at present, Hong Kong Stock Connect does not have special regulations on secondary listed companies with different rights of the same shares, but the current regulations allow the Shanghai Stock Exchange and the Shenzhen Stock Exchange to add "other conditions." it means that Chinese-listed stocks with different rights of the same shares can be unilaterally excluded by the Shanghai or Shenzhen stock exchanges.

In response to this problem, Li Xiaojia, CEO of HKEx, publicly stated at the listing ceremony on February 14, 2020, "it is the common ideal of all financiers to enable Chinese people to invest in China's best new economy companies." I believe that good things should happen, and what should happen will happen. It is only a matter of time, not whether it will happen or not.

14. BABA and NetEase, Inc have no shortage of money in their accounts, so why do they have to go public for financing?

According to the prospectus, NetEase, Inc held cash, current term deposits and short-term investments totaling $10.7 billion on March 31, 2020, while BABA held cash and short-term investments totaling $32.9 billion on September 30, 2019. BABA and NetEase, Inc also have a large amount of operating cash inflows for a long time. According to the prospectuses of the two companies, BABA and NetEase, Inc plan to raise more than $12.1 billion and $2.7 billion respectively for secondary listings.

Although BABA and NetEase, Inc are not short of money, it does not mean that financing is meaningless-larger cash reserves can give companies more options, such as strategic acquisitions. BABA and NetEase, Inc may also want to build a certain trading volume and investor base in Hong Kong, and issuing new shares is the best way.

At the same time, the share prices of BABA and NetEase, Inc were both at historic highs when they were listed for the second time. Just as the stock price is too low is an opportunity for companies to buy back shares, it is generally believed that the stock price is high or overvalued is a good time for equity financing.

15. What is the process of secondary listing of Chinese stocks in Hong Kong?

The first step is to choose an investment bank as a sponsor. (the investment bank used for the first listing is often chosen for the second listing)

The second step is to pre-communicate with the HKEx.

The third step is to submit an application for listing. (secondary listing can be submitted secretly)

The fourth step is the listing hearing.

The fifth step is the roadshow.

The sixth step is to list and trade.

16. Does secondary listing in Hong Kong need to be approved by the shareholders' meeting?

Unlike the legal capital system in China, companies listed in the United States follow the authorized capital system. Under the authorized capital system, the number of authorized shares (authorized shares) of the company is initially determined in the articles of association and can then be adjusted by the shareholders' meeting. Through private placement and secondary listing, the board of directors can decide at any time to issue authorized but unissued shares without the approval of the shareholders' meeting. The number of issued shares (outstanding shares) of a company is always less than or equal to the number of authorized shares. BABA, NetEase, Inc and JD.com did not pass the shareholders' meeting in the secondary listing in Hong Kong, but were directly decided by the board of directors.

17. Can the secondary listing of Chinese stocks in Hong Kong be listed without financing, similar to Spotify and Slack?

Spotify and Slack went public in the United States in 2018 and 2019, respectively. Unlike traditional IPO, Spotify and Slack adopt a direct listing (direct listing) model, with no new shares issued or financing. Traditional IPO has three advantages-financing, increasing awareness and obtaining liquidity. Before the listing, Spotify and Slack have abundant cash reserves and already have high visibility, but they still need to give investors and shareholding employees a way to cash out, so the two companies choose to abandon the traditional IPO and list directly.

It is theoretically feasible for the secondary listing of Chinese stocks to be listed without financing, two senior people in the industry analyzed to "later LatePost". But in fact, because there is no precedent, the HKEx's attitude is unclear.

18. Will there be a price gap between Hong Kong and US stocks in the secondary listing of Chinese stocks in Hong Kong?

Since the secondary listed stocks in Hong Kong and the original US stocks are completely two-way convertible (fully fungible), theoretically there will be no price difference between the stocks. In fact, due to the different trading hours in Hong Kong and New York, as well as the tax system and other details, there will be a slight price difference between secondary listed companies-according to Goldman Sachs Group, the average price difference between the two places since BABA's secondary listing is less than 2%.

19. How to price the secondary listed shares in Hong Kong?

As the secondary listed stocks in Hong Kong and the original US stocks are completely two-way convertible (fully fungible), the pricing of new shares is basically in line with the US stock price. Since a certain amount of new shares are issued, a small discount is often given. BABA, NetEase, Inc and JD.com offered discounts of 2.6 per cent, 6.6 per cent and 3.9 per cent respectively for secondary listings.

20. What is the long-term impact of the return of US-listed stocks on the HKEx?

HKEx has been one of the world's largest stock exchanges for years-seven of the past 11 years have led the world in terms of IPO financing. However, in the past, Hong Kong stocks have long been dominated by financial and real estate companies, with few technology companies except Tencent. It is also widely believed that Hong Kong investors are not bullish on technology stocks compared with US stocks. After the reform on April 30, 2018, the proportion of technology stocks has gradually increased, whether it is attracting Chinese unicorns or US-based Chinese stocks.

According to a research report by investment bank Jefferies on May 27, 2020, financial stocks account for half of the total weight of the Hang Seng Index, and real estate stocks account for 10%, but with the addition of technology companies such as XIAOMI, Meituan, BABA and NetEase, Inc, Jeffery expects the Hang Seng Index to be "revamped" as a result. For many Chinese unicorns, Hong Kong has become the preferred place to list.