After SEC finalized the rules relating to the Holding Foreign Companies Accountable Act (HFCA) in December last year, the next shoe to drop would be the Public Company Accounting Board (PCAOB) to identify which ADRs become ineligible for US listing. That latter would very much depend on which accounting firm does the ADR company audits – is there adequate disclosure primarily on foreign government ownership and the use of VIE structures. After that the companies have three years to comply with the rule (regulators may shorten that to 2 years). If the authorities are still not happy with the disclosures, the ADRs get delisted. So, the earliest delisting is 2024 at the moment.
This paper analyses case studies on Chinese companies that delisted from US exchanges in the past. There have been 80 such companies between 2001 and 2019 of which 29 are still operating, 26 are out of business, 14 relisted in HK/China, 11 were acquired. About ¼ of those companies actually had a positive performance (IPO price minus stock delisting price). Moreover, companies that relist themselves on Chinese stock exchanges (including Hong Kong) or get acquired by private equities have already shown positive returns before delisting, on average.
In 2015 alone, 29 Chinese ADRs announced their decisions to delist and go private. A similar wave of Chinese ADRs announcing to delist and go private also occurred during the 2011-2014 period. This paper suggests that the wave of Chinese ADRs announcing to delist and go private in 2015 was mainly motivated by the Chinese government’s economic policies and regulatory changes. In that sense, it is different from the wave of going private during 2011-14, which was more likely motivated by undervaluation. It looks like the potential 2024 delisting would be caused by US regulators.
One option after delisting from US exchanges is an equivalent listing in HK. This is the default assumption of many foreign investors who have been switching to a HK listing already. But for those that don’t have a HK listing already, a listing on the A-share market either directly – an extremely cumbersome process as it would require the unwinding of the VIE structure, in most cases – or indirectly, via a CDR is a real possibility. CDRs are akin to ADRs and allow foreign-incorporated Chinese companies to list at home (the VIE structure remains intact – Ninebot a small scooter maker became the first such company to issue CDRs in September 2020). This could work well for Chinese internet ADRs which generally trade at a discount compared now to similar names in the A-share market.
Could forced delisting be averted? Possibly, if the US and China find a way to resolve their differences before the period of non-compliance is enforced. For example, in Europe, China was able to negotiate an arrangement known as “regulatory equivalence” whereby EU regulators accepted the auditing work done by the foreign accounting firm. This is extremely unlikely in the US given the current tensions between the two countries and the example of recent Chinese accounting irregularities (Luckin Coffee).
Another option is for Chinese companies listed in the US start to start complying with the necessary regulatory requirements. That is also extremely unlikely because it would require Chinese companies to hand over data and materials viewed as critical to national security by the Chinese government.