By Joanne Chiu
Hong Kong is becoming an active center for trading stock in some
of China's largest technology groups, bolstering the case for more
secondary listings of U.S.-listed Chinese companies.
The city now accounts for nearly a fifth of the shares changing
hands by value in Alibaba Group Holding Ltd., after the e-commerce
giant's Hong Kong listing in November, FactSet data show.
Since NetEase Inc. and JD.com Inc. made their debuts in Hong
Kong last month, their Hong Kong shares have accounted for about
33% and 21%, respectively, of total turnover by value, according to
FactSet. The proportions for NetEase and JD.com could decline over
time given that trading volumes tend to spike when a new company
comes to market. All three companies already had American
depositary receipts in New York.
The solid turnover signifies keen interest from individuals and
institutions alike, which could make it more appealing for other
companies to follow suit. It also means extra business for Hong
Kong Exchanges & Clearing Ltd. and the city's brokerages. In
May, Alibaba was the second most heavily traded stock in Hong Kong
after Tencent, according to the city's stock exchange.
The secondary listings so far, and a likely wave of further
deals, have helped bolster confidence in Hong Kong's future as a
capital-raising center, at least for Chinese companies. That comes
even as Beijing's imposition of a tough new security law has raised
broader concerns for international business in the city.
Stephane Loiseau, head of prime sales and execution for Asia
Pacific at Société Générale, said the listings had created new
liquidity, rather than just cannibalizing U.S. trading volumes.
He said trading volumes could rise further if stocks join key
indexes, and if mainland Chinese investors are allowed to trade
them through Hong Kong's Stock Connect program.
Mr. Loiseau said activity in related derivatives, such as
Alibaba warrants, reflected healthy appetite from individual
investors and had helped increase trading in Alibaba shares.
"Retail investors feel that they have strong views on this stock,"
he said.
Zafar Aziz, head of strategic sales and depositary receipt
investor-relations advisory at Deutsche Bank, said secondary
listings boosted overall liquidity for companies with depositary
receipts, making it easier to trade sizable positions with less
risk of market impact.
He said, however, that U.S. listings remained important for
brand-building, incentivizing staff, creating an acquisition
currency and raising follow-on funds.
The prospect of potential U.S. delistings, plus a 2018 loosening
of Hong Kong's listing rules, has helped spur the share offerings.
Mohammed Apabhai, head of Asia-Pacific trading strategy at
Citigroup, said for U.S.-listed Chinese companies, mounting
political risks in the U.S. were "a very significant push factor"
toward Hong Kong offerings.
Some 22.4% of Alibaba's shares are now held in Hong Kong,
disclosures show. A majority is held by Citigroup Inc.'s Citibank
unit, which manages Alibaba's depositary receipt program,
suggesting much or all of this position corresponds to holdings of
major shareholders, rather than freely tradable stock.
Over time, many major institutional investors are likely to
build holdings in both markets. They might do this by buying Hong
Kong stock in an initial offering or in the secondary market,
rather than handing back their existing U.S. holdings.
"What you'll see is the big international investors having
holdings in both ADRs and Hong Kong shares," said Mr. Aziz at
Deutsche Bank.
Capital Research and UBS Asset Management are among investors
that hold both kinds of Alibaba shares through one or more units,
FactSet data show.
Overall, though, most investors holding depositary receipts
haven't swapped them for Hong Kong ones. Many investors contacted
by The Wall Street Journal said they retained their U.S.
securities, since any eventual delistings could be years away, and
Hong Kong shares incur higher trading costs.
Others plan to trade in both markets, hoping to capture
potential headline-driven trading opportunities given that the two
sets of securities are interchangeable. A few Asia-based investors
have moved their holdings to Hong Kong for easier trading
hours.
"Most people in the market still think that delisting is a long
way away, " said Mr. Apabhai at Citi. "Unless they're required to
do something, the default is to do nothing." He said investors were
watching for arbitrage opportunities but these were limited.
Alibaba's depositary receipts have risen nearly 12% this year,
while JD.com's and NetEase's equivalent securities have surged
nearly 75% and 45%, respectively.
Write to Joanne Chiu at joanne.chiu@wsj.com
(END) Dow Jones Newswires
July 08, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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