CITIC Securities discusses the delisting of Chinese concept stocks: It does not change the intrinsic value of enterprises and will bring incremental liquidity to the Hong Kong stock market

The issue of Chinese concept stocks delisting has reignited. We believe that according to the provisions of the Accelerating Foreign Companies Accountability Act, Chinese concept stocks in the U.S. may face delisting pressure as early as the first half of 2026; additionally, the U.S. may continue to criticize the VIE structure of Chinese concept stocks. Reviewing the key points in the historical evolution of regulation on Chinese concept stocks, we find a negative correlation between the trading volume of Chinese concept stocks listed in both markets in the U.S. and the price changes after the outbreak of delisting risks. However, as of Q1 2025, the trading volume of these stocks in Hong Kong has reached 37%, suggesting that the impact of new delisting risks may be less than in historical periods. Looking back at fund holding data, nearly half of the fund holding value of Chinese concept stocks listed in both markets converted to Hong Kong stock holdings during the entire delisting risk fermentation period, reflecting that Hong Kong stocks indeed have the capacity to absorb trading and investors from U.S. stocks under the delisting risk. Currently, the overall institutional and fund holding value proportion for Chinese concept stocks listed in both markets is 24.09%, among which we estimate that there will be a forced sale of $10.34 billion in value, or 1.46% of the market value of Chinese concept stocks listed in both markets, under the assumption of delisting in the U.S. Furthermore, we do not believe that Hong Kong stocks cannot absorb a large-scale return of Chinese concept stocks. On one hand, the liquidity of the Hong Kong stock market has significantly improved; on the other hand, the forced delisting from the U.S. effectively transfers trading from U.S. stocks to Hong Kong stocks, bringing incremental liquidity to the Hong Kong market. Additionally, under the short-term price impact, there will be buying support in both markets. The forced delisting from the U.S. does not change the intrinsic value or fundamentals of the companies, and the short-term negative impact may present a good buying opportunity.

The issue of Chinese concept stocks delisting has a long history, and besides continuing to strengthen information disclosure issues, the corporate structure of Chinese concept stocks may also be a target.

U.S. Treasury Secretary Scott Bessent, when asked about the delisting issue of Chinese concept stocks during an interview with Fox on April 9, 2025, stated, "Everything is on the table"; on the same day, the newly appointed SEC (U.S. Securities and Exchange Commission) Chairman Paul Atkins made radical statements regarding the delisting issue of Chinese concept stocks in the U.S. Senate, further igniting market concerns about the delisting of Chinese concept stocks. According to the Accelerating Foreign Companies Accountability Act, as early as the first half of 2026, Chinese concept stocks may face delisting risks due to PCAOB audit issues. Additionally, we speculate that the ownership risks brought by the VIE structure will be a focus of U.S. regulatory attention, and we believe that it is not difficult to implement a new regulatory law concerning the corporate structure of Chinese concept stocks.

Going public in Hong Kong to avoid delisting risks is a backup plan for U.S. listed Chinese concept stocks.

As of April 25, 2025, there are 34 Chinese concept stocks listed in both Hong Kong and the U.S., among which 12 stocks are listed as secondary listings in Hong Kong, and 22 stocks have completed dual primary listings in Hong Kong, accounting for 72% of the total market capitalization of Chinese concept stocks. There are still 23 Chinese concept stocks that have not yet gone public in Hong Kong, which may account for 21% of the overall market capitalization of Chinese concept stocks. We estimate the conditions for secondary/dual primary listings in Hong Kong based on the "Secondary Listing Rules." If Chinese concept stocks listed in Hong Kong face mandatory delisting in the U.S., the dual primary listed stocks will have no impact in Hong Kong, while the secondary listed stocks will automatically convert their Hong Kong shares to primary listings. The Hong Kong Stock Exchange will also provide a grace period regarding the "Listing Rules" as appropriate. Based on historical cases of stocks listed in both Hong Kong and the U.S. that have delisted in the U.S., it is common to provide a channel for converting ADRs to Hong Kong shares as a delisting solution in the U.S., with the Hong Kong market ultimately taking over most of the original U.S. stock trading and U.S. investors.

U.S. stocks with a high proportion of ADR trading may be more severely impacted.

We selected three key regulatory event nodes in history corresponding to critical stages in the evolution of audit regulation for Chinese concept stocks, analyzing the proportion of trading volume in both Hong Kong and the U.S. for Chinese concept stocks listed in both markets and the correlation between their stock prices. The results show that the higher the proportion of trading volume in U.S. stocks before risk events, the greater the selling pressure faced in the U.S., leading to more significant downward pressure on stock prices. However, as of Q1 25, 37% of the trading volume of Chinese concept stocks listed in both Hong Kong and the U.S. has occurred in the Hong Kong market, significantly higher than during the delisting risk outbreak period from 2020 to 2022. Therefore, we believe that the potential short-term stock price impact caused by a new round of delisting risks for Chinese concept stocks may be more limited than before.

Stocks with a high proportion of holdings by U.S. funds are more severely impacted, especially those held by funds limited to investments only in the U.S

We have compiled data on the holdings of funds in Chinese concept stocks from mid-2021 to mid-2022. During the period of escalating delisting risks, we found that 34% of the funds holding Chinese concept stocks listed in both markets made share conversions, or 46.2% of the market value of their U.S. stock holdings was converted to Hong Kong stock holdings. Among actively managed funds, 33.5% converted the market value of their U.S. stock holdings to Hong Kong stocks, while the conversion rate for passive funds was as high as 80.9%. Currently, among the 34 individual stocks listed in both Hong Kong and the U.S., according to disclosure data since the end of 2024 (including fund holdings, 13-F, 20-F, etc.), the proportion of institutional and fund holdings in the U.S. stock market accounts for 24.09% of the total. Furthermore, based on the investment scope of the funds, those investing in the U.S. may not be able to convert their holdings into Hong Kong stocks. Therefore, we estimate that there will be a forced sale of $10.34 billion in market value, accounting for approximately 1.46% of the market value of Chinese concept stocks listed in both markets, under the assumption of delisting in the U.S.

The "historical" liquidity issue of Hong Kong stocks does not constitute a barrier for Chinese concept stocks to return.

We do not believe that the Hong Kong stock market will be unable to accommodate the return of Chinese concept stocks. On one hand, the liquidity of the Hong Kong stock market is gradually improving, and the cash available for Chinese concept stocks seeking secondary listings in Hong Kong is relatively ample, with little pressure in the primary market; on the other hand, the "historical" liquidity issue in the secondary market can be attributed to the investor structure and historical market structure of the Hong Kong stock market, which has also improved following the influx of Chinese concept stocks. Historical data shows that the return of Chinese concept stocks has actually brought a significant amount of liquidity to the secondary market in Hong Kong, changing the trading structure of the Hong Kong stock market and enhancing its attractiveness with the listing of quality assets. Moreover, the forced delisting in the U.S. effectively shifts trading from the U.S. stock market to the Hong Kong stock market, bringing incremental liquidity to the Hong Kong market. In the short term, under the impact of stock price fluctuations, there will be buying support in both markets; and the forced delisting in the U.S. does not alter the intrinsic value or fundamentals of the companies, making the short-term negative impact a potential buying opportunity.

Article authors: Xu Guanghong, Wang Yihan, Source: CITIC Securities Research, Original title: "Overseas Research | Hong Kong Stock Strategy: The Storm of Delisting Strikes Again, Chinese Concept Stocks Finally Show Their Resilience"

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