Event: on March 10, 2022, the securities and Exchange Commission (SEC) announced that five Chinese ADRs were included in the “temporary delisting list” according to the foreign company Accountability Act, including Baiji Shenzhou, yum China, zaiding pharmaceutical, shengmei semiconductor and Hehuang pharmaceutical. Overnight, Baiji Shenzhou, yum China, zaiding pharmaceutical, shengmei semiconductor and Hehuang pharmaceutical fell 5.87% / 10.9% / 9.02% / 22.05% / 6.53% respectively. All stocks fell sharply overnight, and the NASDAQ Jinlong index closed down more than 10%, the biggest decline since October 2008.
The result of this incident may be similar to the result of the United States forcing China’s three major telecom operators to delist in early 2021. 1) These two “forced delisting” events have limited impact on the company’s daily operation and fundamentals, and the symbolic significance is greater than the practical significance. The market had certain expectations before. The delisting and delisting of the three major operators are the implementation of the administrative order of the U.S. government prohibiting U.S. investors from investing in enterprises owned or controlled by the Chinese military in November 2020. The time and content requirements are in line with expectations. The main businesses of the three operators are in China, and their business share in the U.S. market is very low. The overall scale of ADR of the three operators is small, with a total market value of less than 20 billion yuan, accounting for only 2.2% of the total share capital of the three companies, insufficient liquidity, small transaction volume and lack of financing and pricing functions. This delisting is mainly symbolic, The direct impact on the company’s development and market operation is quite limited. After the five Chinese concept shares were included in the “temporary delisting list”, the relevant person in charge of the company responded that “we believe that the company’s daily business will not be affected. This determination is based on the routine operation required by the foreign company Accountability Act, which is already in our expectation.”
2) these two “forced delisting” events have led to sharp fluctuations in stock prices in the short term, but there is much room for repair in the long run. Solid fundamentals or the cornerstone of valuation repair. With the good basic orientation of the three operators, the stock price is repaired quickly. In 2020, China Mobile achieved a revenue of 770.1 billion yuan, a year-on-year increase of 2.90%, a net profit of 104.2 billion yuan, a year-on-year increase of 4.02%, a revenue of 393.6 billion yuan in China Telecom Corporation Limited(601728) 2020, a year-on-year increase of 4.74%, a net profit of 20.9 billion yuan, a year-on-year increase of 1.68%, a revenue of 332 billion yuan in 6 Chang Jiang Shipping Group Phoenix Co.Ltd(000520) 20, a year-on-year increase of 9.14%, and a net profit of 14.4 billion yuan, A year-on-year increase of 15.12%. According to the announcement of each company, the five Chinese concept stocks included in the “temporary delisting list” have been taking positive actions since the introduction of the foreign company Accountability Act, including evaluating, designing and promoting additional business processes, seeking solutions, and committed to meeting the requirements of the US SEC by the deadline of 2024. At the same time, due to the relatively low proportion of overseas business of zhonggai shares and no refinancing after the issuance of ADR in the United States, the dependence on the United States is low, and the company’s daily business will hardly be affected. Therefore, even if the U.S. shares are forced to delist, it will have little impact on it, and there is a large repair space in the long run.
The return or revaluation of Chinese stocks in US stocks has become the mainstream choice, with listing in Hong Kong or returning to a. 1) For companies that have been re listed in Hong Kong stocks, their valuation may be affected in the short term. It is expected that they will benefit from China’s business development and ADR conversion in the long term, and their value will be revised. In the future, they can log in to A-share re listing, expand Trading volume and strengthen liquidity, and their value is expected to be further improved. 2) For companies that are not re listed in Hong Kong / A shares, listing in Hong Kong may become the mainstream choice. Since 2018, Hong Kong has begun to create favorable conditions for welcoming the return of China concept shares. In 2018, the Hong Kong Stock Exchange amended the main board listing rules to allow China concept shares to be listed in Hong Kong for the second time; In October 2019, the Hong Kong Stock Exchange announced that it would accept the secondary listing of the same shares with different rights; The next month, Alibaba landed in Hong Kong stocks, opening up a relatively low-cost return path for the return of Zhongyu shares. The high threshold of A-share listing, the great difference between China and the United States in the listing system and legal system, and the high exit cost of investors all restrict the return of China concept shares to A-share re listing. However, the trading volume of A-Shares is larger and the liquidity is stronger than that of Hong Kong shares. It is expected that the return of China concept shares can obtain a more ideal valuation, and mainland institutions are also providing policy support for red chip enterprises to land on the science and innovation board and gem, which may attract companies with good performance to choose A-Shares for re listing.
Investment suggestion: it is suggested to pay attention to the investment opportunities brought by the valuation repair after the irrational decline of share price disturbed by emotion, and pay attention to the fundamentals of relevant subjects
Risk tips: policy risk, international relations risk, foreign capital outflow risk, the impact of delisting event continues to increase, and the risk of insufficient comparability between telecom operators and targets affected by this event
