On July 23, a document entitled “Opinions on Further Reducing the Burden of Compulsory Education Students’ Homework and Off-campus Training” issued by the Central Office was circulated on the Internet. The “Opinions” contain measures that prohibit the “capitalization” of education and training institutions, and that discipline training institutions are not allowed to go public for financing and other measures. Educational stocks listed overseas have fallen accordingly.
For example, New Oriental shares in HKEx was “cut” (New Oriental S, 23 fell 40.61%, No. 26 and then closed down 47.02%; New Oriental Online No. 23 and No. 26 fell 28.07%, respectively, 33.45%; New Oriental U.S. stocks closed down by 54.22% on the 23rd ) . On the 23rd, Gaotu fell 63.26% in U.S. stocks, and the future fell by more than 70%.
The official has officially announced the document on the evening of July 24 (for details, see: Full text: “Opinions on Further Reducing the Burden of Students’ Homework and Off-campus Training in Compulsory Education” ) .
Today’s article does not analyze Document No. 40 of the China Office, but wants to discuss two issues:
- First, why do so many Chinese companies choose to list in the United States?
- Second, taking into account China-US relations, Ruixing’s fraud, and Didi’s delisting, what is the future of these Chinese concept stocks listed overseas?
1. The main reason
Chinese companies’ enthusiasm for listing on American stock exchanges has almost surpassed that of any other non-U.S. company, even after the apparent cold in Sino-US relations.
In 2019, 32 companies went public in the United States, and 34 in 2020. In the first half of 2021, 37 companies have completed their listing in the United States. According to wind data, as of July 2021, a total of 286 Chinese companies have been listed in the United States-including those registered in offshore centers such as Hong Kong or the Cayman Islands, but most of their revenue and profits come from mainland China-in fact Most Chinese companies listed in the United States have basically adopted this approach to listing.
Since 2018, while suppressing Chinese technology companies, the United States has raised audit requirements for Chinese companies going public in the United States. The overall environment for Chinese companies to go public in the United States is not good, so why do Chinese companies still choose to go public in the United States?
Several well-known reasons are:
First, the establishment of the capital market in the United States was relatively early, and the financing system and laws and regulations were relatively more mature and complete. From the perspective of the overall financing environment, the United States is generally optimistic about Internet companies and high-tech companies. If the same stock is listed in the United States, it is relatively easy to obtain a higher valuation and raise more funds.
Second, and more importantly, the US capital market adopts a registration system and does not set a profit threshold for companies to be listed. As long as your company’s business grows rapidly and occupies a large market share, it can go public even at a loss. my country adopts an audit system, and the necessary condition for applying for A-share listing is to make profits for three consecutive years.
Internet companies are growing fast, so they are always short of money. Some Internet companies may have become unicorns with a valuation of more than one billion in just a few years after they were founded. At this time, they are facing the pressure of investors to realize cash and the pressure of further development. They must prepare to go public for large-scale fundraising, but most The company may have just begun to make a profit at this time, or even not yet, so it cannot meet the three consecutive years of profitability, and it will not be able to list and raise money in the A-share market. If you wait for two or three years to go public to raise funds, you may not only miss the best opportunity for development, you will not be able to raise funds, and it will become unknown whether the company will survive. Therefore, you can only go abroad.
Third, China’s listing approval cycle is variable . In case of suspension of listing approval, the entire process may take three to four years if a company wants to go public. Time is money, and many companies cannot afford to wait.
The above three reasons, especially the second and third, should be the two most important reasons for Chinese companies to go public in the United States. But in addition, there are several reasons that should not be ignored.
2. Reasons of birth
We often say now that Chinese Internet companies are doing very well. We usually refer to around 2000 as the first year of China’s Internet. But we must not forget that in the early days of the development of the Internet, few people could understand this type of business, so it was impossible for these companies to get bank loans.
In fact, it is not only the Internet start-up period, but also the start-up period of all enterprises, it is difficult to get bank loans. Due to the strict loan approval procedures and natural risk aversion of commercial banks, they would rather earn less loan interest than lend money to stable companies.
Banks are not institutions that invest in start-ups. Investing in start-ups should be done by angel investors and venture capital institutions. At that time, there were no venture capital (VC) and private equity (PE) in our country . These Internet companies cannot find money in China, but they need money for their development. What should they do? Only foreign capital can be introduced.
You know, in the early stages of reform and opening up , we also used domestic markets for foreign capital and technology. Capital is neutral. It doesn’t matter whether it is good or bad. If you just use geographical area as the basis for classification, of course it is possible. But if you want to make value judgments, it is more important to look at the specific things that these capitals are used for, rather than the origins of these capitals.
Therefore, many Internet giants in China (in order to avoid unnecessary trouble, I will not give an example here) , at the beginning of establishment, they were Sino-foreign joint ventures. This raises another question: the legality of the VIE structure.
Variable interest entity structure (Variable Interest Entity) , abbreviated as VIE structure, is usually referred to as “agreement control”. It refers to a listed entity registered overseas by a company to be listed, which is separated from the mainland business operation entity, and the overseas listed entity adopts an agreement Ways to control the main body of domestic business operations and transfer income and profits to overseas companies. The VIE structure has derived many different forms, but the essence is the same, so I will not expand it here.
This is because China’s laws impose strict restrictions on the access of foreign funds in the “information transmission, software and information technology service industries”, and foreign capital is not allowed to directly invest in telecommunications and Internet-related companies. Of course, companies in these industries are not allowed to raise funds or go public directly overseas. Therefore, these companies adopt the VIE structure to bypass supervision.
Of course, supervision knows this form. The reason why it is not completely prohibited is that on the one hand, this structure is not “obviously illegal,” and on the other hand, it is of course a kind of supervisory wisdom.
However, if such enterprises are listed in China, they still have to strictly follow the regulatory requirements for listing. Then the legality of this VIE structure has become a problem, so it cannot be listed directly in the country.
This means that some Internet companies have been crooked since the day they were born. If the roots are not crooked, they will not survive. If they survive, they will be left with a bad background-“lack of money-introducing foreign capital-becoming a joint venture-adopting a VIE structure-domestic listing legality is problematic-overseas listing”.
It’s getting better now. my country’s multi-level capital market is becoming more and more perfect. There are also more RMB venture capital and private equity. The problem of not being able to find money in China has been greatly eased.
Wang Xiaobo said in “The Silent Majority” that it is too easy to make value judgments. If we are a male rabbit, we naturally know that the big bad wolf is bad and the female rabbit is good. But the rabbit doesn’t know how to recite the multiplication table. To understand the above background, it is a bit of a nine-nine multiplication table. No matter what value evaluation we make for Internet companies going overseas listing-how to evaluate is our freedom, but at least our judgment is based on the complete context of the matter. from.
Three, other reasons
There are two other reasons, namely, the free circulation of capital and the pursuit of different rights in the same shares .
As mentioned earlier, since many companies’ sources of funds include international private equity funds and venture capital companies, and China has implemented foreign exchange controls, listing on the domestic market, it will be troublesome for venture capital funds to exit profitably, and there is exchange risk, so they also have the motivation to encourage Business owners are listed overseas. Some business owners have the ambition to become a multinational company and are willing to go public in the United States. This is not only conducive to expanding the company’s reputation, but also conducive to corporate fundraising and global asset deployment.
Let’s be a little bit more verbose. Private equity and venture capital are eating a bowl of high-risk and high-yield rice. As long as they can make money in compliance with laws and regulations, it cannot be said that there is something wrong with the profit-making exit after the company is listed. Of course, if you violate the law and discipline, you must be held accountable in accordance with the law.
Someone may ask, when listed in Hong Kong, capital can flow freely. Entrepreneurs and early investors of listed companies can easily convert the Hong Kong dollar raised from the listing into US dollars or any other currency. This leads to another reason, “same share with the same rights” and “same share with different rights.”
Companies listed in mainland my country must strictly abide by the same-share-same-rights regulations, that is, how many shares you own in the company and how much voting rights you have when voting on major events. This is why many companies do not want to go public, and are afraid of what they will have after listing. There are not many shares, resulting in the founder of the company being speechless on the board of directors and even being kicked out. This is also the reason for the previously popular “barbarians” hostile takeover. As long as others hold more shares than you, even if you are the founder, you will be kicked out.
Before 2018, listing in Hong Kong is also a requirement for the same shares and the same rights. In 2018, the Hong Kong Stock Exchange introduced a reform that allowed technology companies and companies in the life sciences sector to adopt an American-style structure with same shares and different rights. Since then, more and more Chinese companies have chosen to list in Hong Kong, or both in Hong Kong, China and New York, the United States.
It’s not that the same shares and the same rights are not good. Everything is pros and cons. Same share rights require founders who hold few shares to be cautious in listing, because after listing, they may be emptied or even kicked out of the decision-making level, but cautious listing may slow down the development of the company and miss the golden development period.
Going public in the United States provides an option of different rights in the same stock, which means that even if you hold less than 50% of the company’s equity, even if you only hold 10% or less, you can maintain control of the company. Although it is convenient for companies to go public and raise funds, it can easily lead to the problem of “inside control”.
Since the actual controller of the enterprise is not the largest shareholder, when the interests of shareholders conflict with the interests of the operator, the actual controller is likely to fake public funds for private purposes, squander private pockets, or adopt some relatively risky business behaviors. In some countries, different rights in the same share are considered to be one of the root causes of corporate governance problems.
Fourth, the crisis of trust
The previous article basically explained why Chinese companies are more willing to go public in the United States. There are various reasons, including regulatory systems and corporate operations. Generally speaking, it is a normal business behavior to seek advantages and avoid disadvantages.
However, after the Sino-US trade conflict escalated, the United States successively sanctioned Chinese companies, and some of them were Chinese companies listed in the United States. This has increased the risk of listing in the United States. Even if some companies have been listed, even if they are not sanctioned, the risks caused by changes in the international relations between the two countries are also increasing. In 2020, Ruixing’s financial fraud has exacerbated the crisis of trust in China Concept Stocks.
The Trump administration took the opportunity to sign the “Foreign Company Accountability Act” before the end of its term, threatening that if China fails to allow the PCAOB to obtain audit work papers for three consecutive years , Chinese listed companies will Delisted by the American Stock Exchange.
On June 22, 2021, the U.S. Senate passed another proposal, proposing that the delisting time could be one year earlier.
The direct reason for the US threat of delisting Chinese companies is to protect US investors from losses caused by accounting frauds similar to those of Luckin Coffee last year. To be honest, this actually seems to make sense. Financial fraud is a crime, not only in the United States, we believe that any country’s capital market must combat financial fraud.
But there are a few problems here.
First, China and the United States have been negotiating on the issue of audit papers, but why are they suddenly turning their faces?
In 2009, my country promulgated a law requiring companies to “in the process of overseas securities issuance and listing, the domestic work papers and other files formed by securities companies and securities service institutions that provide relevant securities services should be stored in the country.”
In 2013, PCAOB of my country and the United States signed a memorandum of understanding on cooperation and provided PCAOB with audit work papers of 4 companies.
From 2016 to 2019, the regulatory authorities of both parties have also tried to cooperate effectively on how to conduct inspections. When the relationship is good, there is discussion and discussion, and when the relationship is bad, it is a bit of turning your face and not acknowledging people.
Second, is the provision of accounting papers an effective form of combating financial fraud?
The securities market supervision and regulations in the United States have been continuously upgraded. For example, in 2002, the “Securities Act of 1933” and the “Securities Exchange Act of 1934” were greatly revised in response to the financial fraud incident of Enron Corporation, which formed the “2002 Accounting Reform and Investment of Listed Companies”. The Public Company Accounting Reform and Investor Protection Act of 2002 , referred to as the Sarbanes-Oxley Act, has made many new regulations on corporate governance, accounting professional supervision, and securities market supervision. This is actually good for protecting listed companies and investors, which is a good thing.
However, after the Sarbanes-Oxley Act, the U.S. Public Company Accounting Oversight Committee was able to review the audit papers of listed companies, but after that came WorldCom, Southern Healthcare, Freddie Mac, American International Group, and Lehman Brother’s accounting problem. The most serious accounting fraud case, is often short-selling by professional bodies, through the use of “Sifu unannounced visits” field survey of business flow and other technical means to identify problems in the audit company will not use these tools.
The American Public Company Accounting Oversight Board (PCAOB) may not be able to detect these financial frauds through auditing working papers. In other words, audit papers may help combat financial fraud, but they are not an essential method and are not always 100% effective.
Thirdly, the important target of the “Foreign Company Accountability Act” is the Chinese concept stock company , but it is not the first day that the United States knows that Chinese listed companies adopt the VIE structure. If the United States believes that there is a problem with the VIE structure, it can directly prohibit the listing of Chinese concept stocks.
When the two countries have a friendly relationship, the audit paper is not a very important issue. The two countries can resolve it through consultation and cooperate in supervision because of mutual trust. This mutual trust is gone now.
Five, take precautions
We hope that Sino-US relations can return to friendship in the new competitive relationship. But if the gap between the two countries grows wider, Chinese companies listed in the United States really need to prepare for both.
For both China and the United States, the delisting of Chinese companies from the US market does not seem to be an unbearable price.
For the United States, despite the relatively large fluctuations in China’s concept stocks, the overall performance of China’s concept stocks is better than that of most US listed company stocks. The losses caused by Chinese corporate financial fraud are also far less than those of American companies such as Enron and Lehman.
If the Chinese concept stocks are delisted, American investors will lose a relatively good investment target. However, after the delisting of the Chinese concept stocks, they can be listed in Hong Kong and A shares. If American investors are still optimistic about Chinese companies, they can continue to buy and invest in Hong Kong through the Qualified Foreign Investor Mechanism (QFII) or interconnection mechanism.
As far as China is concerned, my country is a country with high savings and a net exporter of capital, and it is not necessary to list funds in the United States. my country’s own capital market is also gradually improving, and the registration system is also being piloted on the Science and Technology Innovation Board. It is likely that it will be fully rolled out in the near future. The valuation of Hong Kong stocks is likely to shrink, but this is not an unacceptable challenge for the entire country.
Therefore, if the delisting of Chinese companies in the United States is not an unacceptable event for the two countries, their destiny will be more affected by international relations and historical processes. At this time, what companies should do is to take precautions and take precautions.
No one wants something bad to happen, but if it happens, it won’t be caught off guard.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/where-will-china-concept-stocks-go/
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