NetEase (NTES) , the Nasdaq-listed Chinese online-gaming company, on Friday raised at least US$2.7 billion with a secondary listing in Hong Kong. Its action, the second by a Chinese company with a U.S. listing, looks set to become a familiar pattern.
The face-value reason for a secondary listing in Hong Kong is that Chinese investors will be able to buy the stock via the connect links from Shanghai and Shenzhen. That should push the price up, since companies on the tightly restricted mainland exchanges trade at higher price/earnings valuations. But the underlying motive may be to prepare for a retreat from U.S. markets.
JD.com JD, the enormous e-commerce platform and delivery company, is preparing for a Hong Kong listing as well. Nasdaq-listed JD.com, a big winner out of China's lockdown by virtue of its extensive delivery force, is looking to raise at least US$3 billion. Its offering will put 5% of the company up for sale to the public in Hong Kong, and Reuters says that may launch as early as next Friday.
NetEase priced its shares at HK$123, Reuters reports, citing two inside sources. The Hong Kong stock is due to start trading on June 11.
With each U.S. ADR worth 25 Hong Kong shares, the price is equivalent to US$392, or a 3.2% discount off the Nasdaq close at $405.01 on Thursday. The video-game maker is selling 171.5 million shares, a term sheet shows. It will sell another 25.7 million if the "greenshoe" over-allotment is taken up, which would bring the total raised to US$3.1 billion.
The company, based in Guangzhou just across the border from Hong Kong, says it plans to use the Hong Kong proceeds for international expansion.
A Chinese foreign-ministry spokesperson, Geng Shuang, on Friday responded to U.S. Secretary of State Mike Pompeo by saying that forcing Chinese companies to retreat from U.S. stock exchanges would hurt U.S. interests. Geng, who coincidentally stepped down from his post today, also said Washington shouldn't make hasty generalizations about Chinese accounting practices.
However, it remains true that Chinese company accounts are treated like state secrets. The lack of transparency is a concern, particularly when there are multiple examples of U.S.-listed Chinese companies collapsing once their operations are put under scrutiny.
U.S. Secretary of State Mike Pompeo said overnight Asian time that Nasdaq's new rules should be a "model" for all other exchanges around the world.
"American investors should not be subjected to hidden and undue risks associated with companies that do not abide by the same rules as U.S. firms," Pompeo stated. "Nasdaq's action should serve as a model for other exchanges in the United States, and around the world."
There's a full-frontal political push from all sides to clean up Chinese listings on U.S. exchanges, after the implosion of Luckin Coffee LK less than a year after it listed on Nasdaq, the latest in a string of such scandals. At the same time, the European Commission is exploring how the European Union should protect its companies from takeovers by international rivals backed by money from foreign governments.
I explained on Wednesday that Nasdaq this week proposed new rules to the U.S. Securities and Exchange that would allow it to hold foreign companies to higher standards. The rules would kick in if the prospective listing comes from jurisdictions such as China, China-listed Hong Kong stocks, France and Belgium that allow what the SEC's accounting arm considers insufficient oversight of accountants.
It is the SEC's Public Company Accounting Oversight Board that needs to inspect the audit work done by overseas accounting firms, and punish those firms if necessary. It has been complaining for years that it is prevented from scrutinizing the work of Chinese accounting firms, even if the companies they audit are listed in the United States. The SEC will hold a roundtable on the topic, likely this summer.
U.S. President Donald Trump also on Thursday issued a memorandum calling for recommendations about how to protect U.S. investors from China's failure to allow audits of U.S.-listed Chinese companies. The memo requests the president's advisory group on financial markets, chaired by Treasury Secretary Steve Mnuchin, to come back with a report within 60 days on what course the president, the SEC and the PCAOB should take.
The U.S. Senate also passed legislation on May 20 that would prevent Chinese companies from listing in the United States unless they follow U.S. audit and regulatory standards. That legislation must still go before the House and president if it is to become law.
Hong Kong stocks closed up 1.7% on Friday, the headiest gains in Asia. That's after last night's memorial service to remember the Tiananmen Square massacre on June 4, 1989, took place peacefully.
This year, the massacre memorial service had been banned for the first time ever under the smokescreen of public-health grounds. But demonstrators carrying candles stepped over the barricades blocking access to Victoria Park, where it traditionally takes place. The ranks of riot police for once stood back, the Hong Kong government wary of bad international publicity. It is not clear if the memorial service will ever happen so publicly again once China imposes its treason-and-sedition law in Hong Kong.
Property stocks in Hong Kong rose 10% this week, and Hong Kong's financials climbed 9%. In both cases, those are the biggest weekly advances since 2011.