Didi hunts for way to delist in New York, rocking other Chinese ADRs
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6 min read . Updated: 05 Dec 2021, 08:33 PM IST - Ride-hailing company has asked investment banks for proposals on how Hong Kong listing, New York delisting might work
Investors punished shares of Chinese companies traded in the U.S. on Friday as Didi Global Inc. searched for ways to back out of its New York stock listing months after the initial public offering drew Beijing’s ire.
The Chinese ride-hailing company’s decision to delist its American depositary shares from the New York Stock Exchange and pursue a listing in Hong Kong marked a new stage in the decoupling of Chinese companies from U.S. markets.
Declines cascaded broadly through U.S.-listed Chinese firms, with stock in Alibaba Group Holding Ltd. falling 8.2%, cutting some $27 billion from the company’s market value. Pinduoduo Inc. retreated 8.2%, Baidu Inc. declined 7.8%. and JD.com Inc. fell 7.7%.
Didi’s beaten-up stock fell more, dropping 22% to $6.07—below its $14-a-share IPO price.
Didi didn’t give any rationale for the delisting, which it said has received support from its board and would later require a shareholder vote. The company ran into trouble with Beijing almost immediately after its $4.4 billion initial public offering. The IPO blindsided Chinese regulators, who launched a data-security review, pulled Didi products from Chinese app stores and began a broader overhaul of the framework for international listings by Chinese companies.
Didi’s announcement came as Washington has been taking a hawkish stance on Chinese companies listed in the U.S. and Beijing is calling its companies to return home. On Thursday, the Securities and Exchange Commission adopted rules that will formalize the process for Chinese companies to be expelled from the U.S. stock market, if they fail to hand over their audit working papers for three years in a row.
The key question is how Didi can depart the U.S. stock market, where investors who bought into the IPO have been sitting on losses for months, after Beijing’s regulatory assault tanked the company’s share price.
The cleanest solution would be for Didi to float in Hong Kong before concluding a U.S. delisting. The option would create the least chaos and is currently a more preferred route by the company as well as Beijing, according to people familiar with the matter. Chinese regulators had nudged the company toward a Hong Kong listing, The Wall Street Journal reported in October.
Didi has asked investment banks to come up with proposals on how a Hong Kong listing and New York delisting might work, according to people familiar with the matter.
One plan that has emerged involves a dual listing in Hong Kong and using the money raised there to buy back Didi’s American depositary shares in the U.S., the people said. That could lead to a move to pink-sheet trading in the U.S. as trading in Didi shares tilts toward Hong Kong, and an eventual complete U.S. delisting, though a dual listing could be in place for a long time, they said.
The Cyberspace Administration of China recently signaled to Didi that it wanted the company to delist from the U.S. by the first half of 2022, according to one of the people familiar with the matter.
Didi is aiming for a Hong Kong listing as soon as the first quarter of 2022, people familiar with the matter said. In doing so, it would join a series of U.S.-traded Chinese companies, including Alibaba, that have obtained so-called homecoming listings since late 2019. This, however, puts the Hong Kong stock exchange and securities regulator in a bind, as Didi currently doesn’t meet the city’s listing requirements.
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Unlike most of its counterparts, Didi would probably have to seek what is called a dual-primary listing, given its short lifespan as a public company, rather than going through the less onerous “secondary listing" process that Alibaba and many others used. The Hong Kong exchange requires companies to be listed elsewhere for at least two years before seeking a secondary listing governed by more lenient regulations.
A dual-primary listing is nearly equivalent to a full-blown Hong Kong IPO, and subjects the company to all of the city’s governance and disclosure requirements.
Didi had been aiming to conduct its IPO in Hong Kong up until earlier this year, but it had to abandon that plan because the company didn’t meet some of the Hong Kong stock exchange’s requirements, the Journal has reported.
The exchange demands listing applicants’ businesses be compliant with local laws and regulations, and fully licensed, in all the markets in which they operate. The frameworks governing ride-hailing vary across provinces and municipalities in China, and Didi and some of its Chinese rivals are far from meeting that requirement.
As of October, Didi Chuxing, the company’s flagship business in China, was 43% compliant, according to the country’s Ministry of Transport. That compares with 35.6% in March, when Didi was still exploring a Hong Kong IPO.
“The Hong Kong stock exchange has a very high threshold for compliance," said Mike Suen, a Hong Kong-based partner specializing in IPOs at the law firm Withers.
“It is a difficult path for Didi if they want to list in Hong Kong, unless the stock exchange grants exemptions," he added. “The exchange would also have to justify the reason for granting exemptions. You can’t say because Didi is big, we have to grant the exemption."
The Securities and Futures Commission of Hong Kong is prepared to grant exemptions, one person familiar with the matter said.
A costlier alternative for Didi would be for a bidding consortium, perhaps including some of Didi’s major shareholders, to bid for the shares they don’t already own. In July, the Journal reported that Didi was considering going private, partly to placate regulators.
Given Didi’s size—after Friday’s plunge it had a market capitalization just above $29 billion—the financing requirements would run into the billions of dollars, and selling shareholders would have to be offered a premium to relinquish their stakes. The option is falling out of favor because of the capital and political costs, according to people familiar with the matter.
Didi’s pre-IPO shareholders will be able to sell shares near the end of this month, as a 180-day lockup period comes to an end. Its prominent investors include Uber Technologies Inc., SoftBank Group Corp. and Tencent Holdings, all of which have substantial stakes in the company.
Conrad Saldanha, senior portfolio manager for Neuberger Berman’s emerging-markets equity strategy, said the broad selloff of U.S.-listed Chinese stocks shows the risk in holding them while rhetoric and regulation between the two countries are heightened.
Mr. Saldanha said his strategy didn’t participate in Didi’s IPO in part because of regulatory concerns. Last year his mutual-fund portfolio started to move its stake in Alibaba from American depositary shares to the company’s Hong Kong-listed stock.
“By and large, our exposure is all migrated to Hong Kong-listed shares," he said of the Alibaba investment.
The SEC’s move brings U.S.-listed shares of Chinese companies that don’t comply with the regulations closer to being delisted, said Louis Lau, director of investments at Brandes Investment Partners.
“Our base case is to prepare for delisting," Mr. Lau said. He said his firm, which owns U.S.-listed stock in Chinese companies, hasn’t adjusted its positions in them on the news, as it is watching for Beijing’s reaction.
This story has been published from a wire agency feed without modifications to the text
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