China reaffirms support for offshore IPOs, but new listings likely to remain small

More than 80 companies have successfully registered with China’s securities regulator to list shares in the U.S. and Hong Kong, and another 23 have registered to issue GDRs in Europe

Key Takeaways:

• A top Chinese securities regulator said 86 companies have successfully registered to make IPOs in Hong Kong and the U.S. since the launch of a new registration system last March
• New listings in Hong Kong and the U.S. are likely to come mostly from smaller companies raising less than $100 million due to data sensitivity issues

By Doug Young

Offshore Chinese stocks may not be getting off to the best start this year, but don’t blame it on the regulators.

China will “steadfastly promote the opening of China’s capital market and work together with all parties to further improve the overseas listing mechanism,” Fang Xinghai, a vice chairman of the China Securities Regulatory Commission (CSRC) said at an industry event last Thursday. His latest show of support for offshore listings by Chinese companies came about a month and a half after U.S. regulators gave a similar show of support at the end of last November.

But those supportive words haven’t done much to cheer China stock investors in Hong Kong and the U.S. The Hang Seng China Enterprises Index and iShares MSCI China ETF (MCHI.US) are both down about 5% in just the first two weeks of this year, extending a slide of more than 10% in 2023, even as the S&P 500 soared by more than 20% last year.

We could be contrarian and say that Chinese stocks may be getting set for a rally later this year, since many of them currently trade at very low valuations. Such optimism seemed warranted at this time last year, and sparked a major rally for offshore-listed China stocks at that time. China had just lifted its draconian pandemic restrictions back then, and the U.S. and Chinese securities regulators were sending signals that their issues that had nearly frozen all new listings since mid-2021 had been resolved.

But just when the regulatory hurdles seemed to clear and a post-pandemic rebound looked likely, the Chinese economy got in the way. The economy was expected to grow about 5% last year, far slower than in previous years. And many economic indicators continue to look quite bleak lately, with no signs that the nation’s property crisis that is one of the biggest drags will be resolved anytime soon.

Truth be told, the current state of low valuations for Chinese stocks seems like the perfect buying opportunity for value investors, since even with zero revenue and profit growth these stocks still have plenty of room to rise before they hit reasonable valuations. But many investors were waiting for such gains last year, and they never came.

Despite all the economic gloom, it’s still good to know that regulatory issues shouldn’t get in the way anymore if and when investors ever rediscover names like Alibaba (BABA.US; 9988.HK) and Tencent (0700.HK), which were at one time among the world’s 10 most valuable companies. Fast forward to the present, where Alibaba is worth just $180 billion, or about one-twentieth the $2.9 trillion value for Microsoft (MSFT.US), which last week passed Apple (AAPL.US) to become the world’s most valuable company.

The U.S. had previously threatened to evict all New York-listed Chinese stocks, but since then has become far less threatening after reaching a landmark information-sharing agreement with the CSRC giving it access to Chinese companies’ accounting records. The CSRC also launched a registration system for Chinese companies that want to list abroad last March, removing another major uncertainty by formalizing a process that was previously unregulated.

Big IPO pipeline

That brings us back to Fang’s latest comments of support, which also included some updated figures on Chinese companies that have registered to list abroad. Fang said 51 companies have successfully registered to list in Hong Kong since the new system was launched at the end of last March, while another 35 have successfully registered to list in the U.S.

He added that yet another 23 companies have registered to sell global depositary receipts (GDRs) to raise a combined $12.2 billion. Such GDRs have been used by more than a dozen Chinese companies to raise money on stock exchanges in Switzerland, Germany and in Britain, as part of Beijing’s campaign encouraging companies to raise funds abroad.

Despite Fang’s words of support and the relatively big number of successful registrations, we should point out that, at least so far, nearly all of those applicants have been relatively pint-sized IPOs. We’ve written about a few of the approved applicants here at Bamboo Works, including insurance company U-BX and ink cartridge maker Planet Image. But only one company to successfully register for a New York IPO so far, electric vehicle maker Zeekr, has the potential to raise more than the $100 million that’s generally considered a benchmark for major IPOs.

Two companies have listed since successfully registering with the CSRC, namely drug maker Adlai Nortye (ANL.US) and car insurance firm Cheche (CCG.US), which made a backdoor listing using a special purpose acquisition company (SPAC). Both have done horribly since their trading debuts, with Adlai Nortye down by more than half since its listing last October, and Cheche down by an even greater two-thirds since its listing in September.

Before the IPO freeze that began around mid-2021, names like medical big data firm LinkDoc, cloud-based interior design company Manycore and online dating app Soulgate had all filed applications to raise $100 million or more through U.S. listings. But all of those companies later withdrew their applications. Only Soulgate tried to restart its IPO in Hong Kong, submitting an application in mid-2022, though it never made it to market.

While the financial-related regulatory hurdles have all been cleared, the big remaining obstacle appears to be data security. China currently requires any IPO applicant with more than 1 million users to undergo a data security review, and doesn’t seem in any hurry to clear such companies for overseas listings over fears that their sensitive user data might become accessible to foreign governments.

That kind of obstacle could make it difficult for many of China’s largest companies to list abroad, since the 1 million user threshold applies to many such companies. That means the days of the blockbuster Chinese IPO in New York and Hong Kong could be largely in the past. That said, we could still see a few big listings from manufacturers like Zeekr,whose IPOs should be less sensitive becauseitdoesn’t have lots of user data.

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