Didi Packs Its Bags For Hong Kong, Week In Review

China Last Night


Week in Review

  • Pinduoduo and Meituan reported Q3 results over the Thanksgiving holiday. The former missed on topline but beat estimates on its bottom line, while the latter saw its margins curtailed by regulation-related expenses, but beat estimates slightly on topline revenue.
  • China released the November manufacturing, non-manufacturing, and services PMIs on Tuesday, all of which indicated an expansion in economic activity over the past month.
  • Hong Kong-listed internet companies had a difficult week overall as investors reacted to less than stellar Q3 earnings reports.
  • Hong Kong internet stocks were mixed on Thursday following Wednesday’s Bloomberg article stating that China will ban the VIE structure. The CSRC, China’s SEC, said succinctly in response that “the news is not true”.

Key News

Yesterday afternoon, the SEC announced how they are going to enforce the Holding Foreign Companies Accountable Act (HFCAA). The timing of the release in light of China’s approval of the 737 Max yesterday might not have been the greatest timing. There was nothing new in the release though US-listed ADRs sold off on the news despite a potential delisting is three years away or potentially two years if the House decides to shorten the window. Ultimately, the SEC is simply doing its job as it is required to enforce the HFCAA. I would point out that the US-listed Chinese companies were allowed to list in the US with the knowledge they could not adhere to the PCAOB audit reviews due to Chinese law. The HFCAA moves the goalposts on them. The companies are stuck, unable to comply with the US law without breaking Chinese law. With over 200 Chinese companies listed in the US, representing nearly $2 trillion of market cap, delisting these companies puts a significant amount of US and global investor capital at risk. This does not hurt China though it hurts US/global investors.

This predicament is why Didi is looking to go private/buy back their NYSE listing or have their US listing removed after relisting in Hong Kong. It is worth pointing out that we do not hold Didi in our flagship strategy. Headlines are saying delisting, but the company could buy back their US shares. Didi sold 316 million shares at $14 a share so, in theory, they have the cash to buy back the stock and take the company private at $8 or $9 (the company had $3.5 billion worth of cash on the books prior to going public, when it raised another $4 billion). A take-private deal seems like an easier way to go about it, in my opinion.

Weibo is going to relist on the Hong Kong Stock Exchange next Wednesday for a similar reason following the path of Alibaba, Baidu, Baozun, JD.com, NetEase, Autohome, Bilibili, and Trip.com, which have all relisted in Hong Kong.

Asian equities ended the week with a strong day except for India. Hong Kong-listed internet stocks sold off overnight following the Didi and SEC headlines. It is worth noting that Mainland investors bought both Tencent and Meituan today in Hong Kong on weakness via Southbound Stock Connect.

Except for the internet stocks, Hong Kong had a decent day as energy and industrials gained +3.65% and +1.65%, respectively. Mainland investors were in a much better mood as Shanghai, Shenzhen, and the STAR Board gained +0.94%, +0.71%, and +1.07%, respectively, on volumes that were just above the 1-year average.

Vice Premier Li’s conversation with the IMF included an indication that the bank reserve requirement ratios could be cut in order to provide support to small and medium enterprises (i.e. private companies). The clean energy ecosystem had a strong day less electric vehicle (EV) stocks on news that many heavily polluting industries may have reached peak carbon. It was a broad rally today with advancers outpacing decliners by 2 to 1.

Foreign investors continue to note the strong outperformance of Mainland stocks versus Hong Kong and US stocks as Northbound Stock Connect saw a healthy $1.447B of net inflow less sales. For the week, foreign investors bought $2.37B worth of Mainland stocks.

Evergrande’s bonds sold off on reports that smaller but equally troubled property developer Kaisa was having problems getting their creditors to agree on bond restructuring terms. There were reports that Guangdong Providence is pushing Evergrande to finish all its projects.