Chinese e-commerce major Alibaba Group is reportedly set to be the second major Chinese technology firm to delay China Depository Receipts (CDR) listing in mainland Chinese capital markets after smartphone manufacturer Xiaomi abruptly scrapped its CDR issuance, which to some was a blow to China’s efforts to attract its technology majors back to home market.
Media reports in March 2018 indicated Alibaba was exploring listing CDRs in China in July in an issue sponsored by CITIC Securities and China International Capital Corporation, with a target fundraise of RMB10 billion ($1.58 billion).
In an official response to this matter, the company commented: “Alibaba is open to issuing shares on the mainland if compliant with Chinese regulations and various circumstances. We have made this clear since the first day of our US listing and have never changed it ever since. We give no comments on the market rumors.’’
A CDR is a form of depositary receipt traded on Chinese stock exchanges which is issued by a bank and represents equity in foreign corporations. Modelled after American Depositary Receipts (ADRs) in US capital markets, under this system part of a corporation’s shares are transferred to a custodian bank that functions as a middleman broker that trades the shares on an exchange outside of China.
Major mainland Chinese technology enterprises such as Baidu and Alibaba Group have listed in stock exchanges overseas – primarily the NASDAQ and NYSE in New York – for less stringent regulations and access to international investors and bond markets among other things, such as the variable interest entity (VIE) structure those companies usually adopt, which rules out for them the chance of home listing as local markets reject VIE-structured companies.
CDRs permit domestic Chinese companies listed overseas to gain access to China’s domestic investors and are seen as a method for bringing local technology firms to Chinese equity capital markets and enable Chinese investors to benefit from the growth potential of such stocks.
In late June, a $1 billion buyback of shares by Baidu was speculated to be linked to a potential offering of CDRs in China. However, concerns have been raised by fund managers over whether the CDR scheme sufficiently addresses uncertainty among Greater China retail investors, as well as the potential for the establishment of an even larger bubble in China’s stock markets. Â
ADRs are fully fungible with their underlying shares and can be issued and deleted in alignment with market demand; brokers can lodge listed shares with a depositary bank that subsequently issues receipts traded in the US. The outcome is that ADRs trade in alignment with the price of underlying shares.
However, CDRs lack this fungible element and and function as a new class of stock rather than being securities created by the bundling of underlying shares, meaning that CDR supply is inflexible and could suffer from arbitrage between China’s mainland markets and offshore markets being difficult, leading to significant price discrepancies between corporate CDRs and primary share prices.
The withdrawal of Xiaomi from its CDR issue was linked to its decision to reduce its valuation prior to its public float on the Hong Kong Exchange (HKEx) and is reportedly rooted in a dispute between Xiaomi and Beijing over CDR valuation.
Chinese regulators are concerned that excessive valuations could lead to to poor performance in Chinese secondaries markets, reducing investor interest in future CDR issues. Notably, there have also been concerns over CDRs undercutting Hong Kong’s IPO market, though these have since been reduced following greater clarity from Beijing.
Currently, Xiaomi is valuing itself between $55 billion to $75 billion, though pre-IPO research from sponsoring banks cited by Thomson Reuters’ IFR has valued Xiaomi between $65 billion and $86 billion.
Due to this move, this could see Beijing facing greater difficulty in attracting the likes of Baidu, Alibaba Group, Tencent Holdings and JD.com (BATJ) to re-list in China’s domestic markets. An account in Caixin indicates that both Alibaba and JD.com have chosen to delay their issue of CDRs while Baidu Inc. has yet to advance a more concrete plan for a CDR issuance.
