Hong Kong-listed companies in the Greater Bay Area can orderly return to the mainland for listing

On June 10, with the issuance of the "Opinions on Deepening Reform and Innovation to Expand Opening-up in the Shenzhen Comprehensive Reform Pilot" by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council (hereinafter referred to as the "Opinions"), the Shenzhen Stock Exchange is expected to welcome "H+A" listed companies.

This outlook stems from the clear statement in the "Opinions" that allows enterprises from the Guangdong-Hong Kong-Macao Greater Bay Area listed on the Hong Kong Stock Exchange to be listed on the Shenzhen Stock Exchange (hereinafter referred to as "SZSE") according to policy regulations.

On this basis, the "Opinions" also specifically point out in the provisions for improving the incentive and constraint mechanisms for financial services to the real economy that support Shenzhen in carrying out special pilot projects for the integration of technology industry finance, and support insurance funds to legally and compliantly invest in private equity investment funds and venture capital funds primarily targeting specific fields established in Shenzhen.

Industry insiders interviewed by Caijing on the evening of the same day generally believe that the issuance of the "Opinions" will bring multiple benefits, which will not only accelerate the second listing of red-chip stocks on the SZSE but also help relevant enterprises listed in Hong Kong from the Guangdong-Hong Kong-Macao Greater Bay Area break the limitations of single market rules and achieve "H+A" dual listings, thereby further enriching corporate financing models and changing the heavy reliance on the "A+H" model.

The in-depth cooperation between the Hong Kong and Shenzhen exchanges can be traced back to the official launch of the Shenzhen-Hong Kong Stock Connect in 2016. The Shenzhen-Hong Kong Stock Connect broke down cross-border investment barriers, and by November 2024, the number of stocks eligible for trading through the Shenzhen Stock Connect and Hong Kong Stock Connect had expanded to 1,519 and 562, respectively. In addition, according to Wind data, there are currently a total of 256 Guangdong enterprises listed in Hong Kong, of which only 50 are listed as domestic entities, while most enterprises have adopted a red-chip structure, with Tencent Holdings being the highest valued, with a total market value exceeding HKD 4.72 trillion.

After the introduction of this new policy, the market is particularly concerned about which companies will also return to the A-share market. Specifically, in addition to Tencent Holdings, it also includes public utility companies such as China Resources Power and China Gas, as well as innovative pharmaceutical companies like Jingtai Holdings.

The reality behind the aforementioned series of related viewpoints is that in recent years, as the pace of overseas expansion of mainland Chinese enterprises has continuously increased, due to considerations of listing costs, the secondary listing of A-share companies in the Hong Kong market has become popular, namely the "A+H" model. However, in this process, there are also some mainland companies listed only in Hong Kong that have low valuations, and returning to the SZSE is believed to obtain higher valuations and raise more funds.

The reason for the low valuations is that investors in the primary and secondary markets require higher risk compensation and return rates for investing in Hong Kong stocks compared to A-shares, the overall liquidity of A-shares is better than that of Hong Kong stocks, and the refinancing system of Hong Kong stocks is more flexible (such as flash placements), resulting in H-shares generally being at a discount compared to A-shares.

"Overall, allowing Guangdong-Hong Kong-Macao Greater Bay Area enterprises listed in Hong Kong to orderly list on the SZSE not only enables relevant enterprises to leverage a series of advantages of the Hong Kong capital market but also benefits mainland investors in investing in this part of the enterprises. It can increase market trading volume, further activate the capital markets of both Shenzhen and Hong Kong, and leverage the respective advantages of the two exchanges," said Xiao Geng, Vice Dean of the School of Public Policy at The Chinese University of Hong Kong (Shenzhen) and President of the Hong Kong International Finance Society, in an analysis for Caijing Zhang Ju, Chief Financial Officer of Shenzhen Technology Co., Ltd., also analyzed for Caijing, stating, "The equity market needs more patient capital and long-term capital, and we also hope that the domestic A-share market can more conveniently and quickly accept unprofitable high-tech companies like UBTECH that are listed overseas to 'return to A' as soon as possible."

"Lifting the restrictions for enterprises in the Guangdong-Hong Kong-Macao Greater Bay Area to be listed on the Shenzhen Stock Exchange according to policy regulations essentially means an expansion of the market for the Shenzhen Stock Exchange. This not only increases the supply of securities assets but also activates the capital market, which is expected to further enhance the financing flexibility and valuation space for enterprises in the Greater Bay Area," said Liao Bo, macro joint chief analyst at Zheshang Securities, in an analysis for Caijing.

"Overall, the leading effect of the Hong Kong stock market is evident, but there are also a considerable number of small-cap stocks with low trading volumes and valuation levels. With the implementation of the registration system in recent years and a significant reduction in administrative approval processes, the rate of Hong Kong companies returning to A-shares has accelerated significantly, helping to further broaden the financing channels for companies and enhance the valuation center," Liao Bo believes.

For a long time before this, related enterprises that had adopted a red-chip structure to list in Hong Kong wanted to return to A-shares, with the main advantage being that the listing entity did not need much adjustment. The main channels were to first complete privatization and then reapply for A-share listing or to spin off subsidiaries for independent listing in A-shares.

With the launch of the Sci-Tech Innovation Board in mainland China in 2019, the registration system reform began, and overseas listed companies finally made breakthroughs in secondary listings in A-shares, but the number of successful cases is not many. The specific operational paths include five categories: 1. Directly issuing A-share stocks for listing in the "H+A" model; 2. Spinning off subsidiaries for listing in A-shares; 3. Major asset sale model; 4. Privatization model returning to the A-share market; 5. CDR model (Chinese Depository Receipts).

From the perspective of motivation, Hong Kong companies returning to A-shares are mainly due to a comprehensive consideration of factors such as valuation, financing costs, regulatory systems, market maturity, business integration and strategic transformation, and flexibility in capital operations.

There are also subdivisions; simply put, the common structures of group companies listed in Hong Kong are divided into two categories: red-chip structure and H-share structure. The former mainly refers to the method of building and restructuring domestic and foreign structures to achieve consolidation of the domestic equity entity under the red-chip structure for overseas listing; the latter refers to a joint-stock company registered in mainland China as the listing entity, issuing stocks and listing overseas.

As of now, there have been no enterprises using the red-chip structure for secondary listings on the Shenzhen Stock Exchange, while the latter has had related cases due to relatively convenient listing. The aforementioned "Opinions" also pointed out that enterprises in the Guangdong-Hong Kong-Macao Greater Bay Area must "list on the Shenzhen Stock Exchange according to policy regulations."

From the perspective of the system, red-chip enterprises already listed in Hong Kong must follow relatively clear rules for secondary listings on the Shenzhen Stock Exchange, including the "Notice on the Pilot Program for Domestic Issuance of Stocks or Depository Receipts by Innovative Enterprises," the "Announcement on Related Arrangements for Innovative Pilot Red-Chip Enterprises to List in the Mainland," and the "Announcement on Expanding the Pilot Scope for Red-Chip Enterprises to List in the Mainland," among others However, the requirements for red-chip companies to list on the Growth Enterprise Market mainly target "red-chip companies that are not listed overseas."

According to the listing conditions published by the Shenzhen Stock Exchange, red-chip companies applying for an initial public offering of stocks or depositary receipts and listing on the Shenzhen Main Board must meet at least one of the standards: Standard 1 (market value not less than 200 billion yuan) or Standard 2 (market value above 20 billion yuan, possessing independently developed, internationally leading technology, strong technological innovation capabilities, and holding a relatively advantageous position in industry competition).

A financial regulatory official from Shenzhen stated in a recent public speech that one of the four key future tasks for local finance in Shenzhen is to "further support and encourage outstanding Shenzhen enterprises and Greater Bay Area enterprises to list in Hong Kong, while also encouraging qualified Greater Bay Area enterprises listed in Hong Kong H-shares to return to the Shenzhen Stock Exchange for listing."

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