Didi's rocky road for moving its stock to Hong Kong

Didi has since suffered a series of regulatory setbacks including the suspension of new-user registrations and app removals. PHOTO: REUTERS

BEIJING (CAIXIN GLOBAL) - Didi Global may have to take unprecedented steps to carry out its plan to shift trading in its shares to Hong Kong from New York with the challenges ahead mounting.

The Chinese ride-hailing giant disclosed its plan to withdraw from the New York Stock Exchange (NYSE) and pursue trading on the Hong Kong stock exchange in a briefly worded statement Dec 3, barely five months after its US$4.4 billion (S$6.01 billion) initial public offering (IPO) June 30.

The offering was the second-largest US share sale by a Chinese company, trailing only Alibaba Group Holding Ltd's US$25 billion IPO in 2014. But Didi's rush to push it through ran afoul of Chinese regulators, who launched a national security investigation of the company only two days later.

Didi has since suffered a series of regulatory setbacks including the suspension of new-user registrations and app removals. And the pending investigation hangs like a sword of Damocles over Didi's business outlook, denting investors' confidence. More than half of its debut-day market value of US$67 billion has been wiped out.

A US delisting of Didi's stock has been speculated by market observers for a while amid regulatory pressures from both China and the US. The question now is how Didi could shift its listing venue in a complex market and regulatory environment and what will happen to current investors.

Analysts said Didi is unlikely to delist from the US market through a privatization, as many overseas-traded Chinese businesses did when they exited the market, due to the high costs and lengthy procedure.

The company may keep its stock trading over-the-counter in the US after delisting while it pushes forward a relisting in Hong Kong, they said. Such an arrangement would maintain the company's current shareholding structure and avoid heavy spending on share buybacks.

Didi didn't elaborate on how it will list in Hong Kong, but a person close to the matter said the company may adopt an approach different from the methods commonly used by many Chinese tech companies seeking alternative flotations in Hong Kong. Didi may seek to transfer its outstanding shares from the US to the Hong Kong exchange under the city's listing-by-introduction regime, which involves no new fundraising or share issuance.

Such an approach would allow Didi to seamlessly convert its US stock to Hong Kong shares, but there is no precedent. "It will take time to see whether Didi can make it possible," the person said.

But achieving a Hong Kong listing could still be challenging for Didi, given its unsolved compliance issues and China's new data security rules for offshore listings. Even if Didi overcomes all the hurdles, its valuation in Hong Kong would shrink significantly, reflecting investors' dismay, experts said.

Nevertheless, the market is closely monitoring how Didi will advance its plan, said Tang Shichun of the American-British law firm Hogan Lovells. The market is carefully observing whether its delist-and-relist strategy could be replicated by other Chinese companies, Tang said.

"Didi's Hong Kong listing path will no doubt to be a bumpy ride, and its US delisting will also face multiple challenges from investors and regulators," said a private equity fund manager. Didi said Dec 3 that its board of directors approved its delisting plan.

According to market rules, the company can submit a voluntary delisting application to the New York exchange as soon as Dec 13 and withdraw its shares from the market 10 days later. But the schedule may vary according to its relisting plan.

Going private vs. going dark

There has been a rising tide of delistings among Chinese companies traded in the US amid growing bilateral tensions and toughening regulatory scrutiny from both sides. For most companies to delist from major exchanges, privatization would be offered by controlling shareholders to buy back shares from investors at a premium.

A privatization often involves complicated review procedures that may take three to five years. Such a plan would be unaffordable for Didi.

Didi's American Depositary Shares (ADS) dropped to less US$7 apiece from the offering price of US$14, creating huge losses for shareholders. A low offer might set off litigation, while taking the company private at the offering price might cost more than US$20 billion, accounting for all of the shares outstanding, an investment banker said.

"Didi will not go private mainly due to the high costs," one person close to the company said.

One solution for Didi would be to put the US shares on the over-the-counter market after delisting from the NYSE, a practice known as going dark, as it pursues a Hong Kong share sale, analysts said.

Stocks delisted from major exchanges can trade over the counter, where turnover and liquidity are limited. The arrangement would maintain the company's current shareholding structure and reduce disclosure requirements.

For companies like Didi with a clear relisting goal, going dark is a better option, the investment banker said.

Instead of privatization, Didi is seeking to convert its US shares to Hong Kong-traded stock, meaning the company will seek a Hong Kong listing simultaneously with the US delisting, an analyst at Citic Securities said.

Relisting in Hong Kong

Chinese businesses that are already traded on major exchanges often seek to relist in Hong Kong through one of three paths. The most-used approach is to launch a secondary listing in Hong Kong, as Alibaba Group did in November 2019.

A secondary listing is subject to less stringent criteria but requires a company to be traded on another market for at least two years, making it unfeasible for Didi.

Another option is a dual primary listing, meaning equivalent primary listings on two capital markets. This approach, adopted by electric car startup Xpeng in August 2020, would require the company to undergo stricter reviews on both markets.

A more feasible solution for Didi would be to pursue a third path - listing by introduction, analysts said. The stock would be transferred from the NYSE share register to the Hong Kong share register.

Since only existing shares can be listed by introduction, no new shares would be issued, and no additional funds would be raised. The vetting process is thus less strict than other methods.

A person close to the company said Didi plans to adopt an approach with mixture of dual primary listing and listing by introduction, making the Hong Kong flotation another primary listing but through the introduction arrangement. The company has been pushing for that plan over the past two months, the person said.

"Listing by introduction costs little, and the procedure is much simpler," the person said. "Hong Kong's regulatory review will be less strict if no new fundraising is made."

Listing by introduction has been rarely used by issuers in Hong Kong. If successful, Didi will become the first US-traded company to list in Hong Kong through such methods.

But there are still mounting challenges ahead for Didi as it must meet a slew of criteria to qualify for a Hong Kong listing given its weighted voting rights structure. The ongoing investigation by regulators in Beijing is also a major uncertainty that may affect the company's eligibility under Hong Kong listing rules.

The biggest challenge is the company's unresolved issue of business compliance that forced the company to drop a Hong Kong listing plan two years ago. The China Securities Regulatory Commission then said Didi would need to fix business compliance issues like the use of unlicensed vehicles and drivers before pursuing the Hong Kong listing.

There's no chance it'll be easier to list in Hong Kong this time around, a person close to the matter told Caixin. According to sources close to the regulator, only 30 per cent of Didi's overall business currently complies with industry rules.

Didi hasn't elaborated on its delist-and-relist plan, but the success of a Hong Kong listing will require more communications between the company and regulators, as well as more disclosures about the compliance and legal issues facing the company, said a person close to the Hong Kong stock exchange.

Investors' concerns

In its Dec 3 announcement, Didi said its US shares would be "convertible into freely tradable shares of the company on another internationally recognized stock exchange" after a shareholder vote sometime in the future, without providing details.

Didi's shares plunged 22.2 per cent following the announcement as retail investors sold 3.37 million ADS that day. Many retail investors rushed to sell the stock to control losses because they were not certain about Didi's Hong Kong listing outlook, an analyst said.

A Hong Kong listing would allow Didi investors to convert their ADS holdings into Hong Kong-traded shares, but there will be additional costs for the conversion as brokerages will charge extra fees. Concerns over rising costs will press more retail investors to dump their Didi shares, analysts said.

Didi already faces several class action lawsuits in the US over allegations of misleading investors and failing to disclose risks. One investor said the chance for retail investors to recoup their losses will be limited.

There are also concerns that some institutional investors may face compliance risks after Didi's shift to Hong Kong as the US barred certain domestic institutions from investing in non-US traded stocks.

According to equity research platform Fintel, 256 institutional investors held Didi ADS as of Dec 8, including Galileo (PTC), Davis Selected Advisers and Coatue Management.

During the third quarter, Hillhouse Capital Group sold out its Didi holdings while Schroders PLC, Wellington Management Co. and Temasek Holdings cut their positions. BlackRock Inc., Bridgewater Associates and State Street Corp. added to their Didi positions during the period, according to data from the US Securities and Exchange Commission.

Even if Didi manages to navigate all the challenges to successfully debut in Hong Kong, its valuation is expected to be significantly lower than that of the US listing, experts said.

Fund managers from two large foreign wealth management firms told Caixin that they choose not to invest in Didi at the moment due to the company's business outlook and regulatory risks.

Besides its data security challenges, Didi also faces regulatory pressure over its labor practices. New guidelines urge ride-hailing companies to improve drivers' working conditions, including by being more transparent about pay, providing them with social insurance coverage, and establishing effective feedback platforms.

Under such regulatory pressures, Didi's profitability outlook is diminishing as Beijing's tightening rules on the ride-hailing industry bring profound impacts to the business fundamentals, a hedge fund manager said.

This story was originally published by Caixin Global.

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