Didi U.S. Exit Adds to Pressure on China Valuations

(Bloomberg) — Chinese technology shares already sell at a discount to their U.S. peers, in part because of Beijing’s regulatory crackdowns. That gap may get wider if more companies follow Didi Global Inc.’s lead and abandon their New York stock listings.

A whopping $1.5 trillion has been wiped off China tech stocks since they peaked in February, and Didi’s decision to move its stock listing to Hong Kong could cast a further shadow over the likes of Alibaba Group Holding Ltd., Baidu Inc. and Bilibili Inc.

No other Chinese company has disclosed a plan to delist from the U.S., but investors are talking up the possibility: U.S. officials are pressing ahead with an effort to boot many of them off the market for not complying with disclosure rules, while Bloomberg News reported this week China wants to close a loophole that let firms list in the U.S.

Losing direct access to the world’s biggest stock market will make it harder for investors to buy shares in China’s tech behemoths, undermining valuations. Investors price companies in Hong Kong’s Hang Seng Tech Index at about 1 time sales, while U.S. peers on the Nasdaq Stock Market trade at 7.6 times.

“There is an argument that Chinese tech shares should be on a discount to U.S. peers,” said Edmund Shing, BNP Paribas Wealth’s chief investment officer, given the regulatory risk in China and the murky legal structure of the U.S. listings.

Didi shares sank a record 22% on Friday to close at $6.07, less than half its June initial public offering price, as traders priced in the crackdown against the company.

The Nasdaq Golden Dragon China Index — which tracks 98 firms listed in the U.S. that conduct a majority of their business in China — extended its decline for a sixth day, its longest losing streak since September. It fell 9.1% on Friday, adding to a five-day loss of 9.6%. The American depositary receipts of Alibaba, JD.com Inc. and Pinduoduo Inc. slumped.

In Hong Kong, the Hang Seng tech benchmark fell 1.5% on Friday and now has lost almost a third of its value this year, while the tech-heavy Nasdaq 100 Index is up 22% in 2021 despite a 1.7% drop on Friday.

“The Chinese ADRs have lost appeal in the U.S.,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai Co.

Some of them may not qualify for the Hong Kong market. More than 270 Chinese companies are listed in the U.S. and more than 150 of them don’t meet the criteria for a Hong Kong listing, according to a report last month from Bank of America Corp. And those that do will find that fewer American investors are willing or able to trade on international markets.

“The investor base of these Chinese stocks will have a dramatic change — some American funds will have to exit forever,” Hao Hong, head of research at Bocom International Holdings Co Ltd., said by phone. “The selling pressure should last for a short term since it’s caused by regulation change, not by their earnings concern.”

Optimists say all the turmoil and the resulting steep discount could give a nice entry point for long-term investors. Hong says it’s a good opportunity to buy as he believes the tech sector has priced in most of the bad news.

“You know, people are not finding many reasons to buy them, but I would be looking at the ones sold off, who’ve already done their listing at home in Hong Kong,” Sam Le Cornu, Stonehorn Global Partners co-founder and CEO, said in an interview with Bloomberg TV.

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