EY: Facing headwinds, more US-listed mainland tech firms seeking HK floats

More Chinese mainland technology companies listed in the United States will seek a secondary listing in Hong Kong triggered by several factors from leveraging domestic policy incentives to shunning geopolitical uncertainties, according to the latest report by consultancy Ernst & Young.

A total of 114 companies in the technology, media and telecom (TMT) sectors turned to Hong Kong for a dual listing following a US initial public offering, representing more than half of such companies, EY said in a report regarding the trend published on Thursday.

Among them, 51 companies saw their market value plunge between 50 to 80 percent by March 2022 from their all-time highs, with 13 suffering losses of more than 90 percent. Aside from the losses, 13 companies chose to delist outright.

"Uncertainties abound in overseas capital markets in recent years and supervision is tightening in the US over time," said Paul Cheung, EY China TMT consulting leader. "The rationale for a dual listing is to have a 'Plan B' outside of the US and ensure capital liquidity."

The report pointed to several reasons for the wave of comebacks, among which Hong Kong's favorable investment environment topped the chart. Notably, TMT stocks enjoyed a higher turnover rate than average performers in the bourse, especially when their market value reaches $300 million or more, Cheung said.

Also, the threshold for secondary listings in Hong Kong has been loosened to having $HK 3 billion ($382.7 million) worth of market value since January from the previous $HK 10 billion, when the company has been listed for five accounting years with good compliance records.

The trend is also bolstered by a suite of domestic policy incentives. Government directives point to concepts like new infrastructure and the digital economy and identify key technologies relevant to tech companies of strategic significance.

Another reason is the better comprehension of business models by domestic investors that leads to fairer, if not higher, valuation, given that most TMT companies operate on the Chinese mainland.

Between 2018 and 2020, the combined market value of TMT companies listed in Hong Kong registered a compound annual growth rate of 258 percent. The bourse witnessed 152 IPOs by TMT companies in Hong Kong last year, raising a total of 365.4 billion yuan.

The report said a secondary listing has a meager impact on the share price and market value of TMT companies, except for the minor decline caused by the macro environment, said Li Kang, EY China assurance partner and China North head of TMT IPO service.

"On the one hand, the second listing offers existing investors an alternate trading marketplace. On the other hand, the full convertibility between the US dollar and the Hong Kong dollar makes drastic revaluation difficult and unnecessary," Li said.

But companies with solid fundamentals have proved to be more resilient amid market turbulence.

For instance, the average 2020 revenue of the six companies experiencing moderate market value contraction following a secondary listing in Hong Kong was 20-fold more than that of the other five companies suffering bigger losses, while the net profit of the former block was 300 times that of the latter.

"Under market volatility, value growth is back on the table," said Cheung. "Value stocks, such as those with good profitability and healthy cash flow, have been able to withstand disruptions and market risks."

Internet players like Alibaba, Baidu and Bilibili have sought a dual listing in Hong Kong as regulatory headwinds have strengthened over the years in the US.