Source｜Yuanchuan Investment Review(ID : Caituandzd)
Author｜Zhao Minghao, Chen Ruoyan
Edit｜Director Huang
Support｜Yuanchuan Research Institute Investment Group
There are short years, and this year is especially large. Since 2020, the Chinese stock market has been in constant trouble.
Earlier this year, Ruixing Coffee was shorted by muddy water, questioning the falsification of its financial and operating data. Unexpectedly, a hit hit, Ruixing was falsified, the stock price plummeted, opened the prelude to foreign institutions to do aerial stocks. Subsequently, iQiyi was jointly short-sold by muddy water and Wolfpack, fortunately, it came from exposing employees to forge contracts to exaggerate sales data. After a series of negative news, the crisis of trust of overseas institutions in the Chinese stock market began to brew.
One wave is unfinished, and the other is rising. On May 20, the US Senate unanimously passed the “Accountability Act for Foreign Companies”, which aims to conduct a more stringent review of all foreign companies listed in the United States. Chinese listed companies in the United States face a sharp increase in the risk of delisting.
The tightening of regulatory policies and the emergence of a new round of overseas trust crisis will inevitably lead to pressure on the valuation of China Prospective Stock. So, what impact does this bill have on the Chinese stock market? Under the crisis of trust, where should China Prospective Share go?
How has the Chinese stock market been going through 30 years of ups and downs?
Going public in the US has always been one of the financing channels for many Chinese companies. Chinese companies traveled overseas to obtain overseas investment, which began in the 1990s and has a history of more than 30 years. Up to now, there are about 269 Chinese stocks with a total market value of more than 1 trillion US dollars.The proportion in China is 3.3%. If this road is blocked, the impact on Chinese companies is definitely there, but it is not as terrible as expected.
In terms of stages, the past 10 years have been the peak period for Chinese companies to go public in the US. From 2010 to 2019, a total of 180 companies went public in the US. Eighteen Chinese stocks are listed in the United States.
Despite the increasing number of companies going public in the US, the overall performance of China Prospective Stocks has not been satisfactory. As of January 31, 2020, of the 208 Chinese stocks with a starting price, about 56% of the companies fell below the starting price, and only 57 kept rising.
Chinese stocks have not been seen abroad for a long time, mainly for two reasons:
Firstly, due to the lack of supervision, some short-selling agencies’ crazy attacks on China Prospective Stocks have exceeded reasonable boundaries. Some short-selling institutions, by twisting and exaggerating the facts, maliciously shorted the Chinese stocks, so that the overall valuation of the Chinese stocks was under pressure, while also reducing the trust of the Chinese stocks.
For example, the muddy water, which is frightening and frightening, has published nearly 100 short-selling reports since its establishment in 2010. Among the more than 30 short-selling companies, 13 have stocks, accounting for about 30%. The battle for fame in muddy waters is the continuous shorting and success of the Chinese stocks Dongfang Paper and Lino Technology.
MoreIt is exaggerated that muddy water succeeded in making aerial stocks in succession, and even spawned many short-selling institutions in a short period of time. Around 2010, there were more than 40 new institutions in the world that do air stocks. In the eyes of overseas institutions, the Chinese stock market seems to be synonymous with “financial fraud”, and it is inevitable that there will be bone picking in the eggs.
Secondly, overseas investors do not have enough knowledge about Chinese stocks, they are not familiar with the business models of Chinese companies, let alone the brand recognition of Chinese companies, and it is difficult to obtain a high valuation. Coupled with a large group of short-selling institutions, staring at the Chinese stocks in a staring manner, many investors are afraid of them, and some Chinese stocks are gradually marginalized.
The severe differentiation of the stock market value in China is the best example of this. A few leading Chinese stock companies have received reasonable valuations, while more Chinese stocks have suffered valuation discrimination.
The Everbright Securities Research Report data shows that as of June 27, 2019, among the private companies with a total market value of more than 800 billion U.S. dollars, only Alibaba shares accounted for more than half of the market value. The total market value of the top 10 private companies in the market capitalization reached US$721.4 billion, accounting for 82% of all private companies. At the same time, a large number of small and medium-cap market stocks are in an awkward position with weak transactions, poor attention and valuation discounts.
High-quality Chinese stocks are sought after by overseas institutions, while more Chinese stocks are marginalized. In this case, the Chinese stocks outside the head company, even if they are delisted from the US stocks, may not be a bad thing; and for those head stocks, the strengthening of supervision has little effect on them .
Chinese stocks that were short in those years
This is not the first time the Chinese stock market has encountered a crisis. The last short-sale wave appeared in 2010.
In 2010, Muddy Water succeeded in making aerial stocks continuously, which aroused the SEC’s vigilance against Chinese stocks. After all, short-selling agencies are always exploiting loopholes, and it is inevitable that there will be a lack of supervision. becauseTherefore, the SEC decided to start to strengthen the review of the listing of Chinese stocks in 2010, and the reputation of the Chinese stocks was damaged, leading to the arrival of a larger short-sale wave.
Public data statistics show that the number of Chinese stocks that have encountered overseas short sales since 2010 has been at least 40. In this wave of short selling in 2010, the total number of Chinese stocks that experienced suspensions and delistings reached 42, of which 28 were ordered to delist and 1 was delisted due to bankruptcy.
Generally speaking, there are four main steps for overseas institutions to make aerial stocks:
1) Lock into short targets;
2) Investigate the target and establish a short position through a hedge fund;
3) Write a short report and publish it, striving to suppress the stock price;
4) The stock price fell and closed short positions to profit.
Of course, these institutions are not short-selling the Chinese stocks. For example, when Muddy Water “sniped” Spreadtrum in June 2011, it was the first time to lose because of doubts about its lack of grounds; last year Muddy Water shorted Anta Sports and finally returned. Citron Research, an older qualified short-selling agency, suffered heavy losses when shorting companies such as New Oriental, Harbin Futai Industry, Qihoo 360, and more.
Where is the way home?
Following the incident of Ruixing Coffee’s financial fraud, the United States quickly introduced the Foreign Company Accountability Act. This bill stipulates that if a company has not been reviewed by the Accounting Supervision Committee of a US listed company for three consecutive years, its shares will be prohibited from trading. Because Chinese companies have long refused to share audit papers with the United States, the enforcement of this bill may result in the withdrawal of a large number of Chinese stocks from the United States.
In the short term, the negative impact of this bill on Chinese stocks will undoubtedly not only further suppress the valuation of existing Chinese stocks, but also lead to the delay or interruption of the listing process of some Chinese stocks; audit institutions to respond to regulatory pressures1. Reduce inspection risks and conduct strict audits, which may lead to more thunder risk for Chinese stocks. In the long run, it may be inevitable that Chinese stocks will return to China.
In fact, since the short selling boom in 2010, more and more Chinese companies have chosen to “privatize and delist”. Data show that from 2015 to mid-2016, a total of 38 Chinese stocks initiated privatization, approaching one-fifth of the total number of Chinese stocks in the US market at that time, reaching the sum of the four years after the 2010 listing boom in the US.
The return of Chinese stocks to the Chinese stock market is not only a matter of urgency, but also an inevitable choice to seek benefits and avoid harm. At present, Alibaba has been listed on the US and Hong Kong at the same time. NetEase disclosed its prospectus this morning and will also be listed on the Hong Kong Stock Exchange on June 11. And Baidu, JD.com, 58 Tongcheng, and Ctrip have also reported that they will return to Hong Kong for a secondary listing. Just now, there was news of Pinduoduo returning to Hong Kong for listing, but it was soon dispelled.
It is foreseeable that the return of Chinese stocks to the Chinese stock market may be the general trend. In general, the return of the Chinese market to the Chinese market requires three steps:
1) Delisting in the US through privatization. The privatization party usually adopts a two-step approach of “offer offer + short-term M&A” or one-step M&A.
2) Remove the VIE structure. A-share listed companies require that the company must be domestically registered, and that the domestic natural person who is the actual controller is not suitable to indirectly control the proposed listed company through overseas companies, especially shell companies registered in offshore islands. If the Chinese stocks are returned to the A-share market, they must first dismantle the VIE structure.
3) Secondary listing on the Chinese stock market.
There are roughly four choices for the Chinese stocks to return to the Chinese market:
First, return to Hong Kong to list. In comparison, this method is relatively difficult. On April 30, 2018, the Hong Kong Stock Exchange launched a reform of its listing system, allowing for the first time in the Main Board Listing Rules to allow non-revenue biotech companies and new economic companies with different voting rights structures to list in Hong Kong. Since most Chinese stocks in the US stock market adopt the VIE structure, this reform will undoubtedly facilitate the return of the Chinese stock market to the Hong Kong stock market.
The second is to go back to the Science and Technology Board for listing. At present, the Science and Technology Board also allows companies with VIE architecture to be listed, but the requirements on the company are relatively strict, and must be an innovative technology red chip company listed overseas.
The third is to return to the A-share main board for listing. There are two main ways to return Chinese stocks to A-share listing: IPO and backdoor listing. However, the process is relatively complicated. If Chinese stocks try to return to the A-share market, they must first complete privatization, dismantle the VIE framework, clean up overseas SPVs and domestic entity equity relationships, and other operations.
Fourth, the new third board is listed. Although this method is relatively easy, the liquidity of the New Third Board is relatively low, and it may not be the best option for the Chinese stock market to return to the Chinese market.
In general, considering the needs of overseas financing, industry supervision, and the ease of listing in the VIE structure, it is expected that the Hong Kong stock market will be the first choice for the return of Chinese stocks. The return of high-quality Chinese stocks may change the structure of Hong Kong listed companies and the “low valuation, low growth” market format. The Hong Kong Stock Exchange recently closed Sanlianyang, a new high since January 2018, and there may be positive stimulus for the Chinese stocks to be listed in Hong Kong.
While supervising overweight, while opening the door of convenience, the Chinese stocks standing at the crossroads, the choice seems not difficult. From Alibaba to NetEase, the return of Chinese stocks may have just begun. This is not a big change caused by the “cup of coffee”, but an inevitable result of the doubled attractiveness of the open Chinese stock market.