Welcome back everyone Ok, so the Chinese ride-hailing
company Didi announced on Friday that they would begin delisting in the United States
and prepare to go public in Hong Kong instead. The official statement says that their board
has authorized the delisting in New York of its American depositary shares “while ensuring that
ADSs will be convertible into freely tradable shares of the Company on another
internationally recognized stock exchange”. Now, the US listing of Didi has been mired in
scandal since almost day one when the company went public back in June of this year raising
4.4 billion dollars. Their US IPO was the biggest listing of a Chinese company in the United States
since Alibaba back in 2014. Just days after the IPO, the Chinese regulators
ordered that Didi’s app be removed from Chinese app stores, they banned them from signing up new
users and announced an investigation into the company’s cyber security practices.
This regulatory crackdown is an ongoing situation where the company still can’t sign up new users
and the government has ordered app stores to remove 25 of Didi’s other apps.
The stock went public at $14, and the shares have more than halved since then - trading
at around $6.50 at the time of filming. So obviously this is a bit of a disaster for
international investors who bought the stock, but rather than just look at what happened,
let’s discuss why China is doing this, and what it might mean for markets going forward.
Now, for well over a year US politicians and regulators have been making noise about not
liking the way international stocks listed on US exchanges have different rules applied to them
than domestic companies. This is the case for all international stocks – but the contentious ones
are Chinese companies. They have shown concern for how this might harm US investors. This is a
bipartisan issue in the United States, in fact it is one of the few things that both Democrats and
Republicans appear to agree on. But while the Americans seem somewhat upset over this issue,
it would appear that the Chinese government is absolutely enraged that their leading
companies would go public on a foreign exchange. The Chinese government are coming at this from a
cyber security front. Didi is the Chinese version of Uber, and while they do collect significantly
more customer data than uber does, investing in the New York listed shares obviously doesn’t give
investors access to any sensitive customer data. The Chinese government already has laws in place
to prevent this data being exported, so we have to then ask if the issue really is about cyber
security, and if not, what is really going on? As of today, there are more than 240 Chinese
companies, listed in the United States, with a combined market cap of over two trillion dollars.
That includes tech companies like Alibaba , financial firms like China Life Insurance and
the online lending company Lufax. Many of these companies will have collected much more sensitive
data than Didi has, and so far they don’t appear to be under the same scrutiny as Didi.
If it is not about cyber security, what is Beijing actually upset about? Well, the fact that China’s
most impressive tech companies have shown such a preference for listing in New York rather than
Shanghai or Hong Kong over the last decade looked to the Chinese Communist Party like a
big endorsement of American capital markets. Not only does it look like an endorsement,
but it could even be seen as a vote of no confidence in China’s markets. Didi,
was possibly the straw that broke the camels back, Didi did not come up with anything new,
they simply followed the well-worn path of companies like Alibaba and Sina Weibo.
Xi Jinping wants to boost the status of domestic exchanges,
and the Chinese capital markets look particularly unimpressive if they are unable to attract the
nation’s best companies. This is more likely to be more the issue with Didi than cyber security.
The US regulatory action against US listed Chinese companies has been fairly light so far.
The regulators have targeted mostly state-owned companies that have no problem raising money in
China and Hong Kong already, and they have pushed for clearer “warnings” from Chinese companies
about the regulatory risks they face back home. There has also been a push to improve audits too.
Since its IPO in June Didi has not released any quarterly earnings reports or held calls with
investors or Wall Street analysts – these things are standard for US listed companies, but Didi
is not breaking any rules in this situation, as there is lighter regulation in place for
foreign companies listed on US exchanges. This has made it difficult for shareholders to understand
how the government crackdown is affecting the overall business. Didi did report in
September that their daily users had fallen by 30 percent since the IPO - this can’t be much
of a surprise for investors considering the situation that the company is in.
This whole delisting announcement comes just before the end of a six-month lock-up period,
where company executives can begin selling their shares in New York.
Now, in the aftermath of Didi’s IPO, Chinese regulators warned that other companies hoping
to follow in its footsteps – by listing abroad - would be subject to more stringent approval
procedures, especially if they managed data deemed sensitive by Beijing. Beijing does not appear to
be done yet, in cracking down on its tech sector. Regulators have ordered social media group Tencent
to stop rolling out new apps. This US delisting and redomiciling should probably worry US
investors, especially if it starts to look like China could follow up with any company deemed
to have access to sensitive data, which would likely include all tech and financial companies.
We have seen a big sell off in Softbank of late, it is down almost 40% year to date. A
lot of this is due to a broader tech sell off, but Softbank has made a bit of a business of floating
Asian tech companies in the United States where they will get the highest possible valuations.
That game may be about over at this point. They do still have their other businesses though,
like We Work – which is the uber of office rentals, Wag – the uber of dog walking,
Zume, the uber of robot made pizzas and of course, Uber – you can think of uber as
like an American Didi. It’s taxis, you know? So, other questions raised by this delisting
is whether – going forward, big data will be seen as a strategic resource by governments worldwide.
We already see this happening a little bit in the west with European data regulations like GDPR,
and the regulatory concern associated with the misuse of data by big tech firms like
Facebook – who had to rename themselves Meta so that we would forget about them.
Obviously, the more politicized an investment becomes, the harder it is to value on
fundamentals, as those fundamentals can change rapidly with the changing political environment.
Another question this situation raises is if it makes sense at all for companies to be listed on
foreign exchanges when they fall under very different legal and regulatory frameworks
in the countries where they operate. The SEC has, finalized a rule allowing it to
delist foreign stocks that don’t meet its audit requirements, and many US-listed Chinese companies
will struggle to provide this information without breaking laws back home in China.
Bloomberg reported earlier this week that China is planning to ban companies
from going public on foreign stock markets through variable interest entities,
closing the loophole used by Chinese companies to raise capital from overseas investors.
The ban is one of a number of changes included in a new draft of China’s overseas listing rules
that may be finalized as soon as this month. The China Securities Regulatory Commission
said on its website last week that this report about banning the overseas listings
of companies using the VIE structure is not true, without giving any further details.
VIE’s sit in a legal grey area, and so investors in these structures have to worry about
any legal changes that could be made in China. Didi indicated it will first seek a listing in
Hong Kong and then urge US ADS holders to convert into Hong Kong listed stock. We will have to wait
and see how smoothly this goes as part of the reason Didi chose to list in New York was to
avoid some of the bureaucracy associated with a domestic listing in Shanghai or Hong Kong. They
will have to be fully compliant with all Chinese laws before being allowed to list in Hong Kong.
It may not be the best time to go public in Hong Kong right now either. IPO’s are down 20% in the
last year in Hong Kong, even though they are up almost everywhere else in the world. Additionally,
when investors are aware that the company (and the entire Chinese tech sector) is out of favor with
the government, they might not rush to invest. Beijing would likely have to provide assurances
that Didi is safe from further regulatory attacks for a while,
in order to get the listing done quickly. It will be interesting to see how this story
develops, it remains to be seen how quickly Didi can delist and relist in Hong Kong,
whether doing this will solve their regulatory problems, and whether other Chinese technology
companies will be forced to follow. If you enjoyed this video,
you should watch this one next. Have a great day and see you again soon, bye.