UBS released a strategy report on the Chinese market, saying that the news caused the stock price of US-listed Chinese stocks to drop by 20% in the past two trading days. UBS is surprised by the market-related selling pressure, which shows that investor sentiment is sluggish, and the downward revision from macro data and recent corporate profit forecasts may also lead to a decline.
However, the bank believes that with the introduction of the mainland government's stimulus measures, corporate profits will pick up momentum in the future, which will provide support for the MSCI China index, which is forecast to be at an eight-year low in the price-earnings ratio of the next year, and believes that the market sell-off has been excessive.
UBS pointed out that institutional investors seem to be the main sellers of Chinese stocks this time, but most of the large Chinese stocks have been dual-listed in Hong Kong. Investors can easily convert their ADRs into H-shares. However, those who cannot convert ADRs into H-shares due to authorization restrictions are believed to only account for 3-5% of the overall ADRs.
The bank pointed out that for Chinese stocks that have been dual-listed, the ADR ownership of the relevant Chinese stocks by institutional investors has dropped by 2.6% in the past three months, indicating that some investors have converted their ADRs into H-shares. Data from the Hong Kong Stock Exchange's Central Clearing System also shows that the Hong Kong-listed portion of dual-listed companies has increased from 48% to 53% of outstanding shares, while conversions have mostly occurred in JD, Alibaba and Li Auto.
UBS said the majority of ADRs (52 companies representing 96% of ADRs' total market capitalization, including 20 companies that are already dual-listed) are currently eligible for secondary listings in Hong Kong. In addition, the Hong Kong stock exchange and regulators are discussing possible relaxation of the listing rules for "technological innovation" companies that fail the profitability test.
Assuming that the final requirements are similar to those applicable to biotech companies (with a market capitalization of over HK$1.5 billion), it is expected that around 41 additional Chinese ADR companies (equivalent to 2% of the total market capitalization of Chinese ADRs) may be eligible to list in Hong Kong.
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