Didi Global to Ditch U.S. Listing and Try Again in Hong Kong

U.S.-linked tech shares have been hammered in Hong Kong here on Friday after the ride-hailing app operator Didi Global DIDI said it will delist its shares in New York, ahead of a proposed stock sale in Hong Kong.

The Didi announcement, released Friday, is short on detail but says the board on Thursday authorized the company to file for a delisting of its U.S. shares. It says the American Depositary Shares will be "convertible into freely tradable shares of the Company on another internationally recognized stock exchange," if shareholders approve the move.

The Didi board has also approved the company to pursue a listing of its class A ordinary shares in Hong Kong, on the main board.

Didi Global's initial public offering last June 30 flopped just days later after Chinese authorities barred it from signing new customers in China based on concerns about how customer data is handled. Didi shares listed at US$14 at the top of their range, but plunged the week after its listing and closed Thursday at US$7.80, down 44% since their debut.

There could be an arbitrage play here, but a risky one. There are no details yet as to the price U.S. shareholders will receive. But it is possible if not probable that shareholders will receive US$14 and "get their money back" in order to stave off the various class-action lawsuits in the works.

Didi shareholders will approve the move. Founder, chairman and CEO "Will" Cheng Wei (with a 35.4% stake) and co-founder and president "Jean" Qing Liu (with a 22.7% stake) together control the fate of Didi.

There are some issues to settle as Didi's operations now stand, but it's highly likely the Hong Kong Stock Exchange will approve a listing for Didi, the market leader for ride hailing in China.

Hong Kong Exchanges and Clearing (HK:0388 and HKXCY), the for-profit company that runs the Hong Kong stock exchange, is hell-bent on developing Hong Kong as a tech center. Its shares got a boost today, up 4.4%, with Hong Kong clearly the venue of choice as Chinese regulators push companies to "come back home."

Misery loves company

It is the U.S.-linked Hong Kong tech sector that is suffering today. The Hang Seng Tech Index fell 1.5% at the close. While 12 of the index's 30 components gained on the day, the companies that also have U.S. listings lurched lower.

Short-video app Bilibili (BILI) led the losses, down 7.2%. E-commerce platform JD.com (JD) , down 6.0%, and video game maker NetEase (NTES) , down 4.8%, were right behind. Mobile videosharing app Kuaishou  (KSHTY)  fell 3.6%.

There were other significant moves down for search-engine operator Baidu (BIDU) , down 2.9%, grocery-delivery app Meituan  (MPNGF) , down 2.7%, Taobao e-commerce platform operator Alibaba Group Holdings (BABA) , down 2.6%, and videogame and WeChat app operator Tencent Holdings  (TCTZF) , down 2.3%.

Electric-car maker BYD  (BYDDF) , which is backed by Warren Buffett, fell 2.5% in Hong Kong. It's not a part of the Hang Seng Tech Index itself, but its non-car subsidiary BYD Electronic (HK:0285 and BYDIY) is, and it was down 1.2%. That subsidiary makes handsets for mobile phones.

Bad news surrounding Didi has been bad in the past for the shares of its largest independent shareholder, Softbank Group (T:9984 and SFTBY). But it is a sign of the ambivalence over the price that U.S. shareholders will receive that Softbank shares sank only 0.7% on Friday in Tokyo.

Softbank Vision Fund, the world's largest tech-focused venture capital fund, owns 20.1% of Didi. Didi's other big outside shareholders are Uber Technologies (UBER) , which owns an 11.9% stake, and Tencent, which owns 6.4%.

A precedent set?

I reported a week ago on word that regulators at the Cyberspace Administration of China had ordered Didi's top management to prepare plans to delist from the New York Stock Exchange. The unprecedented move raises profound doubts about the viability of listings for other Chinese tech companies in the United States, and indeed the whole process of Chinese companies listing abroad.

The authorities ordered Chinese app stores to remove 25 apps run by Didi in July, with its other operations in bike sharing, bus pooling, auto leasing, food delivery, car insurance and personal loans also affected. The high-profile action against Didi, with its US$4.5 billion IPO the largest by a Chinese company in the United States since Alibaba listed in 2014, caused justified skepticism about how Chinese regulators view the rights of overseas shareholders.

Didi pressed ahead with its stock listing on June 30, satisfying the requirements of Chinese securities regulators. But it did not heed a "suggestion" from the cyberspace administration that it delay the offering to address concerns about customer data. In early July, Didi and two other companies that had listed in early July were all forced to pull their apps and stop signing new customers.

At that time, there was not an established cyberspace-approvals process in place for tech companies looking to list abroad. China subsequently approved a new rule that requires companies with the personal information of more than 1 million users to submit to a review by the new and previously obscure Office of Cybersecurity Review if they want to list abroad.

That office was only created in May 2020 but now has a powerful say-so in whether Chinese companies can sell shares on international markets. Though Hong Kong's market is open to international investors, unlike the walled-off stock markets in Shanghai, Shenzhen and Beijing, Chinese Communist Party officials clearly believe they have greater influence there than in London or New York.

All companies, foreign and local, that gather data on customers in China must store that data on servers within China. So it is not clear what worries Chinese authorities about a Chinese company that holds data inside China but has international shareholders. The shareholders can't access that data, but there is the potential for a hostile takeover that could wrest control of the company.

A new data-privacy law went into effect in China on Nov. 1, well after the Didi listing. It stipulates how companies must handle and store data, telling them only to gather the minimum information necessary to process transactions.

Chinese tech companies have gone public abroad using the structure of a Variable Interest Entity, normally a Cayman Islands company that has a legal agreement giving it the economic benefits of the operations of a Chinese dot.com. The structure skirts rules preventing foreign investors from buying into the Chinese Internet sector.

It's very unlikely that Chinese authorities are going to allow VIE structures in the future. What happens to those that already exist is not clear, but the Didi fiasco demonstrates the Chinese Communist Party is highly likely to force any company it considers significant to delist in New York and sell shares in Hong Kong instead.

At the time of publication, McMillan had no positions in the stocks mentioned.