UBS Equities-China Equity Strategy _ADR delisting concerns rise again… ex...-114639306

ab11 April 2025Global ResearchChina Equity StrategyADR delisting concerns rise again… expect less impact this time HK portion has likely overtaken the US part for ADRsThe US Treasury Secretary in a media appearance indicated the possibility for US-listed China ADRs to be delisted as a part of the conditions for trade negotiations. While in 2021 and 2022 such delisting fears resulted in an average drawdown of 22% for the ADR names, we would expect any potential impact to be more manageable this time around given: 1) many of the large cap ADRs now have dual listing, 2) for those that are dual-listed, the proportion of HK holdings has also increased 30ppts in the past three years to c.60% of the combined market cap, 3) a significantly higher southbound ownership of the HK market which has risen from 5% of market cap in 2021 to 11-12% currently. Nevertheless, the uncertainty around the future direction of US-China relations could continue to pressure share prices in the near term. ADR delisting exposure has declinedDelisting concerns for ADRs are not new: the introduction of SEC delisting rules under the Holding Foreign Companies Accountable Act in 2021 alarmed investors though the issue was resolved with agreement between the authorities on the auditing procedures (PCAOB announcement). We estimate that there are currently c.230 US-listed China ADRs with a total exposed market cap of US$460bn in the US which is down from US$1.1trn in late 2021 (here we refer to the US component of an ADR's market cap, based on our estimate). Potential fundamental implicationsWe would expect a delisting from the US to have the following impacts: 1) reduced access to the deeper capital pool in the US, 2) lower trading volume with the trading velocity in HK historically c.0.2% lower compared with the US (see Figure 7), 3) increased concerns of financial decoupling between the US and China, and 4) potentially lower valuation multiples for loss of investor base and lower liquidity though this is difficult to quantify. Nevertheless, we note that the capital raising of ADRs has diminished in recent years (see Figure 6) while HK's role has increased. Furthermore, the level of trading volume in HK has also picked up materially in recent periods with the velocity almost on par with the US. The HK Stock Exchange has previously provided guidance on the requirements for ADRs to be secondary listed in HK (see Figure 3 for a simplified view of the rules). The largest names that currently do not have dual listing in HK include Didi, PDD and Full Truck Alliance, though based on the HK listing requirements, it would seem that these large stocks would be eligible for secondary listing - we provide a list of those potentially eligible stocks in Figure 2. How could the share prices react?ADR share prices saw an average drawdown of 22% on the two previous occasions when: 1) new SEC standards for listing under the HFCAA in December 2021 came about, and 2) when Alibaba was added t