- Forced delistings from U.S. markets could close out a key funding channel for Chinese companies, increasing credit risks.
- However, we see limited risks for the seven Chinese issuers we rate that have primary U.S. listings.
- These firms have other equity-funding options upon any potential exits from U.S. bourses.
New requirements proposed by the U.S. Congress and the Trump administration could lead to delistings by Chinese companies that trade on U.S. exchanges. S&P Global Ratings sees this as a potential credit issue. Loss of equity-funding channels can limit financing options, and in some cases cause a dramatic increase in leverage or even trigger a default event and accelerate payment on debt.
We rate seven Chinese issuers with primary listings in the U.S. (see table 1) In our view, most of these issuers have alternative share-listing options, limiting the risk of weakened liquidity or rising leverage if any issuers had to make a fast exit from New York-based bourses. Only one company, 21Vianet Group Inc., faces default triggers in the event of delisting.
The delisting threat has grown more pressing since the Trump administration released a proposal earlier this month that would require U.S.-listed Chinese companies to have their China-based audits reviewed by special bodies. The Trump proposal is arguably softer than the related bill the Senate passed in May this year; however, it has a shorter deadline on compliance. Chinese companies unable or unwilling to comply with the audit request would have to delist as soon as Jan. 1, 2022, under the administrative proposal.
Alternatives To U.S. Listing Alternatives Are Growing
Other global bourses, as well as China's domestic markets, have been setting the stage to attract Chinese listed firms that might no longer trade on U.S. bourses. Given alternative options, as well as the potential for dual-listed firms to convert U.S. script into shares in Hong Kong, we do not expect any forced delisting would lead to downgrades. However, those without dual listing are more at risk, especially for those with lower credit ratings and weaker liquidity positions.
In September 2019, Hong Kong Exchanges and Clearing (HKEK) released new guidelines to make it easier for U.S.-listed Chinese companies to initiate a secondary listing on the Hong Kong stock exchange. For example, such companies do not need to re-audit or reconcile financial reporting, the exchange will waive some listing requirements, and it allows for weighted voting rights (i.e. dual-class shares) structures. Previously the HKEX had rejected weighted voting rights, which is a common shareholding structure for internet companies. Hong Kong is also open to variable interest entity (VIE) structures, which are needed to allow for foreign investments in restricted sectors such as the internet (see "Revisiting VIE Risks For Our China Ratings," published on RatingsDirect on July 17, 2019).
The reduced time and requirements have already attracted secondary listings to Hong Kong from Alibaba Group Holding Ltd. and JD.com Inc. (see table 1). We expect most of the other rated U.S.-listed Chinese issuers to have sufficient time to complete a secondary listing to avoid losing an important channel for funding and liquidity (see table 1). This report does not cover the four companies we rate with secondary listings in the U.S., given such companies face minimal risk of a delisting.
|Many U.S.-Listed Chinese Issuers Have Low Leverage; Some Have Dual Listings|
|Primary listing (ticker)||Secondary listing (ticker)||Issuer credit rating||Liquidity scores||Financial risk profile||Market cap (mil. US$)||Cash & ST investments (mil. US$)|
Alibaba Group Holding Ltd.
|NYSE:BABA||SEHK:9988||A+||Exceptional (no impact)||Minimal||686,227||51,287|
|NasdaqGS:JD||SEHK:9618||BBB||Strong (no impact)||Minimal||97,594||8,843|
Vipshop Holdings Ltd.
|NYSE:VIPS||-||BBB||Strong (no impact)||Minimal||15,372||1,383|
|NasdaqGS:WB||-||BBB||Strong (no impact)||Minimal||7,729||2,404|
Noah Holdings Ltd.
|NYSE:NOAH||-||BBB-||Strong (no impact)||Minimal||1,879||727|
21Vianet Group Inc.
|NasdaqGS:VNET||-||B||Adequate (no impact)||Highly leveraged||2,715||315|
Xinyuan Real Estate Co. Ltd.
|NYSE:XIN||-||B-||Less than Adequate (no impact)||Highly leveraged||167||668|
|SEHK--Stock exchange of Hong Kong. NYSE--New York Stock Exchange. ST--Short-term. Mil.--Million.|
STAR Market raising significant new liquidity for issuers
Another increasingly attractive listing option is the Shanghai Stock Exchange's STAR Market. Like the Nasdaq Stock Market, which is home to high-profile internet and technology firms that publicly listed while still loss-making, the STAR Market selectively offers minimal listing requirements relative to the mainboard exchanges. For example, STAR Market does not require a track record of profitability for some industries (see table 2).
|STAR Market's Listing Rules Are Flexible|
|Minimum financial requirements|
|STAR Market||Main board (Shenzhen & Shanghai)|
|Market capitalization||RMB1 billion*||N/A|
|Revenue||RMB100 million in the prior fiscal year||RMB300 million in the prior three fiscal years|
|Aggregate net profit||No requirements||RMB 30 million and no losses in the prior three fiscal years|
|Aggregate operating cash flow||RMB100 million in the prior three fiscal years||RMB500 million in the prior three fiscal years|
|*STAR has multiple listing options with different requirements, we selected this set of requirements as we believe it is most suitable for our rated issuers. RMB--Chinese renminbi. N/A--Not applicable. Source: S&P Global Ratings.|
STAR has been one of the world's active listing markets since launching in July 2019 (see charts 1-2)
Thus far, the market has offered abundant liquidity and attracts high valuations. For example, Semiconductor Manufacturing International Corp. (SMIC) raised US$7.6 billion listing on the STAR Market, where it trades at trailing price-earnings (P/E) ratios of nearly 170x. This has pushed up its multiples in Hong Kong, where it previously traded on a 40x P/E ratio, compared with 55x now.
Audits Lie At Center Of The Delisting Threat
The U.S. government is increasing pressure on Chinese companies to provide access to documents and audit work papers for review by the Public Company Accounting Oversight Board (PCAOB), a body Congress established to protect investor interests. Currently Chinese laws prevent the transfer of audit work conducted in China to foreign jurisdictions and the PCAOB is restricted from inspecting audit work and practices of such firms in China or China-based operations.
To enforce the review of such documents and audits, the U.S. Senate passed the Holding Foreign Companies Accountable Act on May 21, 2020. The draft law would delist Chinese companies that do not provide required information and access to PCAOB over a three-year observation period. The Trump administration's separate but similar proposal on Aug. 6, 2020, has an earlier deadline of Jan. 1, 2022, to become compliant. However this proposal would give Chinese companies the option to adopt a U.S.-based auditor that would effectively allow PCAOB to review the audit reports.
Our base-case view is that companies should have sufficient time to arrange alternative listings ahead of any forced exits from U.S. markets. However, if for any reason they went private without making other arrangements, a materially negative impact could ensue. This is particularly true for companies with lower credit standing and weaker liquidity, as they would be losing an important funding channel at a time when such companies already face challenges accessing the capital markets in uncertain times. Additionally, a delisting could also trigger payment acceleration of 21Vianet's U.S.-dollar-denominated bonds, an event that would result in a rating downgrade.
- Revisiting VIE Risks For Our China Ratings, July 17, 2019
This report does not constitute a rating action.
|Primary Credit Analyst:||Clifford Kurz, Hong Kong (852) 2533-3534;|
|Secondary Contacts:||Ava Chang, Hong Kong (852) 2533-3530;|
|Ce Wang, Hong Kong (852) 2533-3505;|
|Hins Li, Hong Kong (852) 2533-3587;|
|Manqi Xie, CFA, Hong Kong + 85225328001;|
|Ricky Tsang, Hong Kong (852) 2533-3575;|
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