Strategy Note /
Global

US-listed Chinese firms are getting squeezed: We pick out some EM alternatives

  • Both US and Chinese regulators have turned up the heat on Chinese firms listing in the US, leading them to underperform

  • We highlight alternatives in 4 key segments: Fintech, e-Commerce/ Logistics, Electric Vehicles, Internet/ Social Media

  • US exchanges and advisors could be the biggest losers; 37 IPOs of Chinese firms raised US$13bn of equity year-to-date

US-listed Chinese firms are getting squeezed: We pick out some EM alternatives
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
13 July 2021
Published byTellimer Research

US-listed Chinese firms have found themselves caught in the crossfire as China and the United States continue to size each other up. A sharp ratcheting up of rhetoric, and enhanced regulation, has driven substantial underperformance of these firms in recent weeks. In this note, we consider alternative firms that could help investors mitigate regulatory and geopolitical risks.

Regulators want better disclosures from foreign companies listed in the US

Under the USA’s Holding Foreign Companies Accountable (HCFA) Act, passed last December and effective as of April, US-listed foreign firms must establish that they are not owned or controlled by foreign governments, and must disclose details of their audit arrangements to the Public Company Accounting Oversight Board (PCAOB), a branch of the US Securities and Exchange Commission (SEC). Three consecutive years of non-compliance could force a de-listing. Separately, the US has already de-listed three large Chinese telcos (China Telecom, China Unicorn and Chine Mobile) due to their links with the Chinese military.

Chinese regulators want to restrict the flow of information abroad

On the other hand, the Cyberspace Administration of China (CAC) has announced that it will prevent companies with more than 1 million customers from listing their shares abroad. For firms with existing foreign listings, any additional issuance of shares would require the CAC’s permission. At the same time, Article 177 of the China Securities Law prevents Chinese companies from releasing abroad documents related to their securities without approval from the China Securities Regulatory Commission, and prevents foreign regulators from conducting investigations or collecting evidence within China.

Chinese firms’ US listings are thus being pulled in two opposite directions

US-listed Chinese firms, therefore, find themselves in an impossible position, with US regulations requiring more disclosures, and Chinese regulations preventing this information from being shared. And this is not some arcane issue. There are 244 US-listed Chinese firms with a combined market capitalisation of US$1.6tn, accounting for around 3.5% of the overall value of the US stock markets. According to Bloomberg, over the past decade, Chinese firms have raised around US$76bn equity on US exchanges. So far this year, 37 Chinese firms have listed on US exchanges, raising a combined US$13bn funds.

Didi’s rapid fall from grace highlights a key area of focus for China’s regulators: customer data. The country's new data security law gives the government greater access to the information collected by tech firms. And by classifying such data as a national asset, this law also places restrictions on its transfer abroad.

US-listed Chinese firms’ shares have taken a tumble

These developments have dampened appetite for many of these US-listed Chinese firms. While some may view this as an opportunity, other investors may regard this as a sign of things to come, with the US and China likely to continue locking horns across a wide range of issues.

US-listed Chinese firms have sharply underperformed

How investors can mitigate these regulatory risks

For this latter group of investors, we have compiled lists of alternative investments that may be subject to less regulatory or geopolitical risk. We have focused on four key growth segments: fintech; e-commerce and logistics; electric vehicles and internet/social media. We have picked out alternative China/Hong Kong listings or operators from other emerging markets in each case.

Fintech

Many Chinese fintech firms have chosen to list in the US. Even Ant Group’s failed IPO has not stemmed the flow. At its October 2020 IPO, Lufax was valued at US$33bn, but this has since fallen to US$22bn. Also in the lending space, we have 360 Digitech, Finvolution and LexinFintech. In investech, key players include Futu Holdings (which listed in April), KE Holdings (a November listing) and UP Fintech (June). OneConnect is in the financial software space and listed last August.

Focusing on Chinese/Hong Kong listings, potential alternatives to these US-listed names include Linklogis and Yixin Group (lending), Hithink RoyalFlush Information Network (investech), Lakala and Yeahka (payments), ZhongAn Online (insurtech) and Hundsun Technologies (software)

Elsewhere in the emerging world, we highlight dLocal, Evertec, Kaspi, Pagseguro and Stoneco in the payments space, and Bank Jago, TCS and Banco PAN in digital lending/banking.

Fintech alternatives

e-Commerce and Logistics

This is perhaps the highest value category of US-listed Chinese firms, including high-profile names like Alibaba, Pinduoduo and JD.com, plus ZTO Express and recent stock market entrant, Didi. The recent Chinese regulatory actions against Didi have cast a shadow over all Chinese firms listed in the US; since its 30 June listing, Didi shares have fallen 20%.

Considering Chinese/Hong Kong-listed peers, the largest alternative investment is the Meituan shopping platform. Other options include Mango Excellent Media. In logistics, local listings include Kerry Logistics, SF Holding, Sinotrans and Yunda Holding.

In other emerging markets, key proxies include Allegro, Mercado Libre, Naspers and Prosus, plus Agility and Inpost.

eCommerce/ Logistics alternatives

Electric Vehicles

It is not only Chinese companies that are suffering from the increasingly tense nature of Sino-US relations. Tesla has encountered significant difficulties in China, including a mass recall of vehicles to fix a software bug. High-profile Chinese firms in this sector that are listed in the US include Li Auto, Nio and XPeng.

Locally listed alternatives to these firms include BAIC BluePark New Energy Technology, BYD, Chongqing Sokon Industry Group, Contemporary Amperex, and Yadea Group.

It is harder to find direct plays on the EV theme in other markets, with traditional car firms predominating instead. Potential alternative investments include Ford Otomotiv, Hyundai Motor, Maruti Suzuki and Tata Motors, whose Jaguar marque plans to be all-electric by 2025.

Electric Vehicles alternatives

Internet and Social Media

Private Chinese firm ByteDance’s TikTok app has proven to be extremely popular with the world’s youth. High profile US listings of Chinese internet and social media firms include Baidu, Bilibili and Netease.

Locally listed alternatives to these firms include 360 Security Technology, China Literature, Giant Network Group, Kuaishou Technology, Kunlun Technology and XD Inc.

In other emerging markets, options include Kakao Corporation, Mail.Ru, Wix.com and Yandex.

Internet/ Social Media alternatives