The Chinese ride-hailing company’s decision to delist its US depository shares from the New York Stock Exchange and pursue a listing in Hong Kong marked a new stage in delisting Chinese companies from US markets.
Alibaba Group Holding Ltd stock fell as much as 8.2%, cutting nearly $27 billion off the company’s market value, sweeping through US-listed Chinese firms. Pinduoduo Inc. Withdrew 8.2%, Baidu Inc. dropped 7.8%. And JD.com Inc. fell 7.7%.
Didi’s beaten stock fell 22% to $6.07, well below its IPO price of $14 per share.
Didi made no argument for the delisting, which she said had support from her board and would require a subsequent shareholder vote. The company ran into trouble with Beijing shortly after its $4.4 billion initial public offering. The IPO blindsided Chinese regulators, who launched a data-protection review, pulled Didi products from Chinese app stores, and triggered a broad overhaul of the framework for international listings by Chinese companies.
Didi’s announcement comes as Washington is taking a hard line on Chinese companies listed in the US and Beijing is calling on its companies to return home. On Thursday, the Securities and Exchange Commission adopted rules that would formalize the process for expelling Chinese companies from the US stock market if they fail to submit their audit working papers for three consecutive years.
The main question is how Didi can leave the US stock market, where investors who have been buying in the IPO have been making losses for months after the company’s stock price plummeted following Beijing’s regulatory onslaught.
The clearest solution for Didi would be to swim to Hong Kong before delisting it to the US. According to people familiar with the matter, the option would create the least chaos and is currently the more preferred route by the company as well as Beijing. The Wall Street Journal reported in October that Chinese regulators had pointed the company to a Hong Kong listing.
According to people familiar with the matter, Didi has asked investment banks to bring proposals on how the Hong Kong listing and the New York listing might work.
One scheme that has emerged involves a dual listing in Hong Kong and the money raised from there is used to buy back Didi’s American depository shares in the US, people said. This could lead to pink-sheet trading in the US as trading in Didi shares shifts to Hong Kong, and eventually full US delisting, although a dual listing could be longer, he said.
According to one of the people familiar with the matter, China’s Cyberspace Administration recently indicated to Didi that it wanted to delist the company from the US by the first half of 2022.
Didi aims to list Hong Kong in the first quarter of 2022, people familiar with the matter said. In doing so, it will join a series of US-traded Chinese companies, including Alibaba, that have received so-called Homecoming listings since late 2019. However, this puts the Hong Kong Stock Exchange and securities regulator in a bind in the form of Didi. Currently does not meet city listing requirements.
Unlike most of its counterparts, Didi will probably have to seek a dual-primary listing, given its younger age as a public company, than the less “secondary listing” process used by Alibaba and many others. instead of passing. The Hong Kong Exchange is governed by more liberal regulations requiring companies to be listed elsewhere for at least two years before seeking secondary listings.
A dual-primary listing is roughly equivalent to a full-blown Hong Kong IPO, and subject the company to all of the city’s governance and disclosure requirements.
Didi aimed to hold its IPO in Hong Kong by the beginning of this year, but had to drop that plan because the company did not meet certain requirements of the Hong Kong Stock Exchange, the Journal has reported.
The exchange demands that listing applicants’ businesses be compliant with local laws and regulations, and be fully licensed in all markets in which they operate. The frameworks governing ride-hailing vary among provinces and municipalities in China, and Didi and some of its Chinese rivals are far from meeting that requirement.
As of October, the company’s principal business in China, Didi Chuxing, was 43% compliant, according to the country’s Ministry of Transport. This compares with 35.6% in March, when Didi was still exploring a Hong Kong IPO.
“The Hong Kong Stock Exchange has a very high threshold for compliance,” said Mike Suen, a Hong Kong-based partner specializing in IPOs at the law firm Withers.
“It’s a tough road for Didi if they want to list in Hong Kong, unless the stock exchange gives an exemption,” he said. “The reason for giving exemption to the exchange also has to be justified. You can’t say because didi hai bada, we have to give exemption.”
A person familiar with the matter said Hong Kong’s Securities and Futures Commission is ready to offer exemptions.
An expensive option for Didi would be a bidding consortium, perhaps including some of Didi’s major shareholders, to bid for shares they don’t already own. In July, the Journal reported that Didi was considering going private, partly to placate regulators.
Given Didi’s size—its market capitalization was above $29 billion after Friday’s drop—financing requirements would run into the billions of dollars, and shareholders would have to offer a premium for relinquishing their bets to sell. According to people familiar with the matter, the option is falling out of favor due to capital and political costs.
Didi’s pre-IPO shareholders will be able to sell the shares by the end of this month, as the 180-day lockup period is coming to an end. Its major investors include Uber Technologies Inc., SoftBank Group Corp and Tencent Holdings, all of whom have substantial stakes in the company.
Conrad Saldanha, senior portfolio manager at Neuberger Berman’s Emerging-Markets Equity Strategy, said the widespread selling of US-listed Chinese stocks shows the risk in holding them, while increased rhetoric and regulation between the two countries.
Mr. Saldanha said his strategy did not participate in Didi’s IPO due to regulatory concerns. Last year his mutual fund portfolio began shifting his stake in Alibaba from US depository shares to the company’s Hong Kong-listed stock.
Regarding the Alibaba investment, he said, “Overall, our exposure has migrated to Hong Kong-listed stocks.”
Louis Lau, director of investment at Brands Investment Partners, said the SEC’s move comes with US-listed shares of Chinese companies that do not comply with the regulations.
“Our base case is to prepare for delisting,” Mr. Lau said. He said his firm, which owns US-listed stock in Chinese companies, has not adjusted its position on the news, as it is watching for Beijing’s response. ,
This story has been published without modification to the text from a wire agency feed
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