An alternative way to go public has gained traction in Hong Kong this year, as Chinese companies move to head off the threat of a potential U.S. delisting, while market turmoil makes it hard to raise new funds at attractive prices.
Shares in NIO Inc. began trading Thursday in Hong Kong, after the Chinese electric-vehicle maker concluded the city’s first listing by introduction since late 2020. Listings by introduction are a way of joining the public markets in which a company doesn’t raise any capital or issue any new shares.
Hong Kong has hosted a handful of these listings annually in recent years, stock-exchange data shows. But companies are looking more actively at this option now, bankers and lawyers say, given Chinese companies risk being booted off U.S. exchanges as soon as 2024, while share prices have fallen sharply, with the Nasdaq Golden Dragon China Index down 58% in a year.
“Listing by way of introduction is a reflection of the market condition and the low share prices,” said Kenneth Chow, co-head of Asia-Pacific equity capital markets at Citigroup Inc.
OneConnect Financial Technology Co. , a fintech firm controlled by Ping An Insurance (Group), filed for a listing by introduction last month. Didi Global Inc., the embattled ride-hailing giant that is preparing to delist from the U.S., is also seeking to list by introduction in Hong Kong.
Listings by introduction are similar to direct listings, which have been used as an alternative to U.S. initial public offerings in recent years by companies such as Coinbase Global Inc., Palantir Technologies Inc., Spotify Technology SA and others.
A string of U.S.-listed Chinese companies have listed in Hong Kong in recent years using conventional stock offerings, including NIO’s rivals XPeng Inc. and Li Auto Inc.
NIO said joining the Hong Kong market allowed it to “further expand our investor base and broaden our access to capital markets.” The company didn’t tie the move to a potential U.S. delisting but flagged that risk in its listing document. It is also planning to list by introduction in Singapore.
NIO Chief Executive William Li.
Photo: /Bloomberg News
NIO raised $2 billion in November by selling stock. The company’s shares have fallen 51% in the past year, FactSet data shows. NIO recorded a net loss of $129.6 million for the third quarter of 2021.
Washington has started the clock on enforcing a law that would delist Chinese companies if U.S. regulators can’t inspect their audit papers for three years in row. Lawmakers in the House and Senate have both separately passed legislation to shorten the time frame to two years, although the two chambers would need to pass the same bill before President Biden could sign it into law.
Listings by introduction can work for companies created by the spinoff of a division of a larger business, and for companies that, like NIO, already have shares trading in another market.
Bigger companies may have a better chance at having a listing by introduction approved by Hong Kong’s exchange, said Ivy Wong, Asia-Pacific chair of the capital-markets practice at law firm Baker McKenzie. “Bigger companies tend to have a longer track record in compliance and are more likely to be able to satisfy the regulatory requirements,” she said.
Listings by introduction can suffer from thin trading volumes, since no new shares are issued.
In NIO’s case, the company and shareholder Tencent Holdings Ltd. will lend American depositary receipts equivalent to 2.7% of its Class A shares to banks, which will convert those securities into Hong Kong shares to help make the market more liquid. That block of shares is worth about $835 million at Wednesday’s closing price. Banks can borrow more stock if needed.
“Companies that list by way of introduction generally exhibit low aftermarket liquidity, which can, in some cases, make them more easily prone to arbitrage or price manipulation,” said Philippe Espinasse, a consultant and former equity capital markets banker, and the author of several books on initial public offerings. “When liquidity is low it doesn’t take much buying or selling to move prices,” he added.
Shares in the fruit distributor Asian Citrus Holdings Ltd. , which listed by introduction in 2009, were suspended on their first day of trading, with Hong Kong’s stock-exchange operator citing “disorderly market concerns.” David Webb, an investor and market commentator, said investors had misunderstood a key financial metric, and that the amount of Asian Citrus stock trading in Hong Kong “was unusually small, which facilitated volatility.”
Companies could issue new shares later if the market becomes more receptive. Prudential PLC listed by introduction in 2010 and last year sold the equivalent of $2.4 billion of stock in Hong Kong. Since the new shares started trading on Oct. 4, an average of roughly 248,000 shares have changed hands daily, according to FactSet, more than 14 times the average in the previous year.
NIO’s newly listed stock dropped 0.7% Thursday to 158.90 Hong Kong dollars, equivalent to $20.32, per share.
A NIO vehicle at an auto show in Tianjin, China.
Photo: Li Ran/Zuma Press
Write to Jing Yang at [email protected] and Dave Sebastian at [email protected]
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