Key takeaways:
- Six domestically listed Chinese companies have announced plans to issue GDRs in Europe over the last month
- Four Chinese companies with existing GDRs in London have received scant interest from investors, with extremely low trading volumes.
By Tina Yip
The threat of forced U.S. delistings has hung over the heads of U.S.-traded Chinese companies like a Sword of Damocles for the past two years. To date, 23 Chinese companies have been cited as facing such delisting risk for failing to comply with the Holding Foreign Companies Accountable Act. And many more could follow.
As they come under increasing scrutiny in New York, some have been quietly exploring other markets for trading in global depositary receipts (GDRs), the global equivalent of U.S.-traded American depositary shares (ADSs) now used by most Chinese companies listed in the U.S. That movement has gained some big recent momentum, with six globally-minded companies listed in China’s domestic A-share market announcing plans to issue GDRs in Europe in the last month.
The U.S. was traditionally the premier destination for major Chinese companies to list their offshore shares. They eschewed other aggressive suitors like London and Singapore, attracted by the wide range of global investors who could buy their shares in the world’s biggest capital market.
Before the past month’s flurry of activity, only five Chinese companies had issued GDRs in Europe. Four were the state-owned quartet of China Pacific Insurance (2601.HK; 601601.SH; CPIC.L), Huatai Securities (6886.HK; 601688.SH: HTSC.L), China Yangtze Power (600900.SH; CYPC.L) and SDIC Power (600886.SH; SDIC.L), which all floated shares in London. The fifth was privately owned Haier Smart Home (6690.HK; 600690.SH; 690D.DE), which listed on the Frankfurt Exchange in Germany.
That number could soon double with the six new applications from a more diverse group of companies aiming to issue European GDRs. They include: construction equipment giant Sany Heavy Industry (600031.SH); medical equipment maker Lepu Medical Technology (300003.SZ); lithium-ion battery makers Guoxuan High-Tech(002074.SZ), Ningbo Shanshan (600884.SH) and Keda Industrial (600499.SH); and wind and solar equipment maker Ming Yang Smart Energy (601615.SH). Curiously, only Ming Yang has chosen the more-established London Stock Exchange, while the other five are heading to the SIX Swiss Exchange.
“I think the most important reason is because China is encouraging Chinese companies to go abroad and internationalize,” said Kenny Wen, a commentator at Everbright Sun Hung Kai Co. Ltd, commenting on the sudden flurry of applications. “With the risk level growing in the U.S., Europe has naturally become a new good choice.”
‘Neutral’ Switzerland
China and Britain announced a Shanghai-London Stock Connect program in December 2018, which became operational in June 2019 and offered a new channel for Chinese companies to raise money in Europe.
But the impetus for the recent flurry of activity came in February this year, when the China Securities Regulatory Commission (CSRC) released guidelines for the depository receipts business under stock connect programs, which added Switzerland and Germany to the list of countries with such connect programs. That was followed by comments on March 16 from a session of the important Financial Stability and Development Committee where China reaffirmed its continued support for companies of all types seeking overseas listings.
Following those clear signals of government support, Sany became the first of the new group to announce its plan to issue GDRs in Switzerland. The company has been expanding its overseas operations fast in recent years. It sold over 20,000 excavators outside China last year, fueling a 65% rise in revenue from its international business. It wants to raise more funding through the new listing to help pay for its movement abroad, especially in the U.S. and Europe, and to strengthen its capacity to supply components globally.
Guoxuan’s overseas business has also grown steadily in recent years, including its signing of a strategic agreement with a major U.S. automaker to become its lithium battery supplier. Keda and Ningbo Shanshan both see GDRs as an opportunity to enhance their global profile and further their global expansion.
Lepu Medical believes its Swiss listing can help connect Chinese and international markets to help meet its funding needs, improve its global profile and boost its exports. And Ming Yang said it would use proceeds from its London listing to manufacture high-end wind, solar, storage and hydrogen equipment as part of its own effort to build up a global operation.
So, why Switzerland? First of all, Europe in general has no laws like the one passed in the U.S., which implies lower risk of being forcibly delisted for Chinese companies. Switzerland also enjoys a global reputation for its strong economy and political neutrality. Stability of the Swiss franc means companies might be better valued in Switzerland than in other parts of Europe. And last but not least, Chinese companies may worry that Britain might follow the U.S. in sanctioning London-listed Chinese companies. The pair’s lockstep imposition of sanctions on Russia for invading Ukraine was an ominous sign in that regard.
Low trading volumes
But just because you list somewhere doesn’t mean people will buy your stock. That’s been the reality for the four Chinese companies already listed in the London, whose trading volume was dismal, with zero trades on most days. Yangtze Power’s GDRs only traded on 57 days last year, with an average daily trading volume of just 148,000 shares. Huatai Securities was traded on 73 days, averaging just 292 shares per day. Pacific Insurance and SDIC Power were both traded in just over 20 days, with the former averaging 295 shares per day and latter a scant 26 shares.
Kenny Wen explained that global investors preferred buying Chinese stocks via the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect programs, and largely avoided Chinese stocks last year in general due to concerns about U.S.-listed Chinese stocks. He added the unfamiliar channels of buying stocks via European GDRs suffered more than other channels.
At the end of the day, most Chinese companies looking to global financial markets are in search of new funding sources, and also seeking to boost their global profiles. A lack of trading of their GDRs won’t affect their operations very much. In that light, success by this first batch of companies taking a bite of the Swiss apple could touch off a wave of followers seeking to tell their Chinese stories to a global audience.
