Hong Kong IPO Activity Likely to Be Resilient in 2025
With regulatory pressures mounting, U.S.-listed Chinese stocks should seek a listing in HKEX
A little under two weeks ago, I had a conversation with Nicholas Gordon, the editor of Fortune Asia Magazine, regarding the drivers behind increased dual-listing activity by U.S.-listed Chinese stocks at Hong Kong. Nicholas quoted me in his article (click here) and here is the fullness of the rationale behind my commentary. Read on!
While political reactions to President Trump’s tariff war against practically every U.S. trading partner are divided along parties, China is largely a matter of bipartisan consensus. In 2017, the United States Trade Representative estimated the cost of Chinese IP infringement to the U.S. economy at $225–$600 billion yearly. In a 2019 CNBC survey, 1 in 5 U.S. corporations stated China has stolen IP within the previous year, while 1 in 3 said it had happened sometimes during the previous century. In 2022, a Chinese state-backed hacker group was accused of stealing trillions of dollars worth of IP from 30 multinational corporations.
Given that targeted measures to limit theft and calls to the Chinese government to halt the theft failed or fell on deaf ears, both the previous administration as well as the current administration brought into place actions to limit China's access to technology. The current tariff war — at least as it relates to China — will likely continue to resonate for years to come.
Note #1: The possible driving factors behind President Trump’s “Liberation Day” tariff war was described in February via articles on the Leverage Shares website as well as on SeekingAlpha.
China’s leading companies have long sought the U.S. markets’ relatively higher liquidity and appetite for growth stocks in the U.S. via listings. However, there has always been a significant impediment in equating these listings with other stocks: for one, the Chinese government has strict mandates on foreign ownership over domestic assets. Thus, these stocks — sometimes referred to as “N-Stocks” — have an interesting workaround: a shell corporation in, say, the Caymans known as a Variable Interest Entity (VIE) establishes a series of contracts with the Chinese company granting the former rights to the latter's profits but not a claim in its assets. The VIE goes on to list in a U.S. exchange with the company's name. Foreign shareholders therefore have no voting rights in or legal recourse against the Chinese company.
U.S. institutions and wealth advisors had long rationalized that eventual market reforms and policy changes will address or inch closer towards equalization with the true meaning of stock ownership. However, this has not materialized in the course of the past two decades: it seems that the People’s Republic of China has its red lines on this matter.
Thus, there is a palpable difference of “moral hazard” in the ownership of a U.S.-listed Chinese stock — which is usually designated as an “American Depository Share” or “ADS” in its SEC filings (and which is entirely distinct from the “American Depository Receipt” or ADR) — versus in virtually every other U.S.-listed stock. Coupled with this is the broad consensus that the “broad China growth” narrative is done and dusted in the wake of economic headwinds in China that were 20 years in the making: much like in the U.S., there are a set number of “Titans” that largely attract an outsized volume of investor interest.
This has long been apparent to us at Leverage Shares. For instance, while Alibaba’s products featured in the Top 3 AUM (“Assets Under Management”) drivers in both 2021 and 2022, they have long since been supplanted by other products.
One inference can be made from the difference in the top 3 slots in AUM versus turnover: although Alibaba was favoured, there wasn’t as significant a volume of price discovery activity — which helps translate to turnover statistics — as with U.S. tickers that were not ADS’s.
Over the past couple of years, a large number of U.S.-listed Chinese stocks have either listed or are in the queue for listing at the Hong Kong Stock Exchange (SEHK). In the U.S. State Department's Investment Climate Statement released in June 2023, economic officers had reported that Hong Kong doesn't discriminate against operations being set up by foreign companies while SEHK maintains that foreign individuals are free to invest in almost any HK-listed stock through a registered broker-dealer. In addition to HK-native broker-dealers, U.S.-based brokers with a local office such as Fidelity also enable U.S.-based investors to purchase these stocks.
However, not all “returnee” tickers are treated the same. When considering some “top recall” names of China — Alibaba (of course), Baidu, Tencent, NIO, XPeng, NetEase, Weibo and JD.com — the difference in volumes traded on a quarterly basis (when measured as ratio between U.S. ticker’s traded volumes to that of the Hong Kong ticker’s traded volumes for each company) tells an interesting story:
Note: Of this list, Tencent is an outlier: while it has a primary listing on HKEX and a secondary listing on the Shanghai Stock Exchange (SSE), it also trades on the OTC Pink Market in the U.S. under the ticker TCEHY, which means that it’s deemed to have a higher risk profile. However, Tencent’s “pink sheets” are sufficiently popular among U.S. instituitionals to warrant an examination.
While Alibaba, Baidu and Tencent have very high and increasing volumes on a quarter-on-quarter basis in HKEX relative to the U.S., the likes of NIO, XPeng and Weibo don’t even come close to par in HKEX relative to American bourses’ volumes. This might be chalked up to a stark difference in forward outlook between investors in the U.S. versus those in China.
For instance, Weibo might be considered as an analogue to Meta’s WhatsApp platform or Apple’s iMessage. However, in China, Weibo doesn’t have as high a switching cost for users as iMessage or even WhatsApp might entail: social connectivity apps are a dime a dozen.
When comparing NIO versus XPeng, the outlook becomes more nuanced. While Western investors might show higher favour to these “pure play” EV carmakers as worthy rivals to (say) Tesla in terms of product quality or innovation, survival in China’s brutal automotive market might be deemed by pure sales volumes: neither carmaker has a model that featured in the Top 10 list by sales volume by month.
Both companies have (very) recently made moves to pump up volumes: while XPeng debuted its mass-market brand “Mona” during its 10th Anniversary Gala in August 2024 followed by deliveries during the Chengdu Auto show in September the same year, NIO debuted its “Tesla Y” competitor under the brand name “Onvo” in May 2024 followed by the debut of the “firefly” mass market brand during the Auto Shanghai 2025 event in late April through May this year. However, public reception has varied widely: while Mona went on to account for a little under half of XPeng’s monthly deliveries by December 2024, Onvo sales crashed 30%, which the management estimated as being due to poor brand recognition. At an average price of ¥138,000, the Mona M03 is a little over half the price of the Onvo L60.
Clearly, sales success across buyer demographics dictates stock conviction over product specs: XPeng’s volume ratio dwarfs that of NIO by a significant margin. However, this doesn’t necessarily translate to ticker price superiority: as of the 7th of May, the price performance of HKEX tickers vs U.S. tickers (measured in percentage terms) has only Baidu inching ahead in the HKEX versus its U.S. ticker; all others run behind.
This substantial difference in price performance is what made U.S. listings so attractive: higher ticker performance could translate to higher Stock-Based Compensation (SBC) for top executives while U.S. capital market liquidity makes it an attractive choice for debt issuances. Given that Chinese companies have long been unable to comply with SEC requirements starting with U.S. auditors being able to examine their books (forbidden by the Chinese government on grounds of “national security”), the risk of delisting for Chinese companies delisting in the U.S. will never be zero.
Independently on market conviction and ticker performance, it would be a sensible idea for every Chinese company to at least pursue a secondary listing in a bid to maintain investor access: Hong Kong is well-represented in terms of foreign-origin brokers and institutions to enable a broad swathe of investors (barring — perhaps — U.S. retail investors) to continue to have access to their tickers.
Possible hurdles in capital markets access is, of course, an entirely different conundrum that Chinese banks and institutions would have to find means to solve.
Postscript: Nicholas’ article featuring my comments were also syndicated into MSN (click here) as well as Ground News (click here).
Chin’s market activity and macroeconomics have featured quite frequently in past articles. For a list of all articles ever published on Substack, click here.