HK bourse shines as US-listed Chinese firms may return home

Financial analysts say the anticipated return of an unknown number mainland companies to the Hong Kong capital market for listings will enhance the city's capital-raising role and will further propel trading volume of the city's stock exchange.

"We note that the capital raising of American Depository Receipts has diminished in recent years while Hong Kong's role has increased. Furthermore, the level of trading volume in Hong Kong has also picked up materially in recent periods with the velocity almost on par with the United States," said James Wang, head of China Strategy at UBS Investment Bank Research.

Wang expects share prices of such US-listed Chinese stocks without dual listings — with higher gearing levels, negative cash flows and smaller market caps — will be most impacted by the delisting tendency.

Hong Kong Financial Secretary Paul Chan Mo-po said on Sunday that he has instructed Hong Kong Exchanges and Clearing Ltd and the Securities and Futures Commission to prepare and ensure that "Hong Kong must be the preferred listing destination" of overseas-listed Chinese mainland firms seeking to return.

He added that Hong Kong has now established a regulatory framework to facilitate dual listings or secondary listings of companies listed overseas in Hong Kong.

US Treasury Secretary Scott Bessent earlier indicated the possibility for US-listed Chinese ADRs to be delisted as a part of the conditions for trade negotiations.

A China ADR is a negotiable certificate issued by a US bank that represents securities issued by a Chinese company and is traded in US financial markets, providing US investors access to investing in Chinese companies.

Wang stressed that a delisting from the US capital market would lead to reduced Chinese enterprises' access to the deeper capital pool in the US market, lower trading volume, and potentially lower valuation multiples due to diminishment of the investor base and lower liquidity.

US investment bank Goldman Sachs said that if relevant US-listed Chinese mainland companies can pursue a dual primary listing or secondary listing in Hong Kong, the potential listing prospects in Hong Kong may catalyze a re-rating of such mainland companies.

The investment bank estimates that 27 US-listed Chinese mainland companies with a total market value of $184 billion will be eligible for dual primary listings or secondary listings in Hong Kong.

If US-listed Chinese shares return to the Hong Kong equity market for dual or secondary listings, Morgan Stanley said, the Hong Kong bourse can make up for the trading volume lost in the US market over the long run, and larger companies in particular are expected to meet the conditions for inclusion in the Shanghai-Shenzhen-Hong Kong Stock Connect.

It said that 80 percent of the market value of Chinese ADRs have already been dual-listed in Hong Kong.

But Morgan Stanley warned that delisting will represent a significant escalation of Sino-US geopolitics, which will be accompanied by an increase in risk premium and pressure on valuations.

Global auditing advisory firms Deloitte and KPMG say Hong Kong's IPO market is likely poised to rebound this year, as more A-share issuers, leading mainland companies, Middle East and ASEAN companies — as well as US-listed mainland companies — are expected to list in Hong Kong.

This is attributable to the enhancements in listing application procedures for A-share issuers, mainland authorities' support for leading mainland enterprises to list in Hong Kong and heightened geopolitical tensions.

On Tuesday, the Hong Kong bourse's benchmark Hang Seng Index edged up 0.23 percent to finish at 21466 whereas Hong Kong Exchanges and Clearing — the operator of Hong Kong stock exchange — dipped 1.67 percent to close at HK$328.4 ($42.1) per share.

Buoyed by expectations that US-listed mainland stocks may return to Hong Kong for listing, HKEX's share price soared 6.9 percent on Monday.