Many Chinese firms operating in e-commerce, electric vehicles, photovoltaic and consumer goods have been actively going global to explore overseas growth, especially in popular destinations like Vietnam, the Middle East, Europe and even the USA. In this story, Mandy Zhu, Vice Chair of Asia, Global Banking at UBS and Lijun Sun, Co-Head of Global Banking at UBS Securities, discuss the challenges and opportunities that come with Chinese companies and investors going global.
Q1: Many Chinese companies are growing their business into overseas markets. What are the reasons behind this phenomenon?
Lijun: Nowadays, Chinese firms have continued their globalization strategy and actions driven by various motivations, including the needs of integrating raw materials and resources, building new factories close to customers, expanding overseas markets, improving profitability and addressing increasingly complex geopolitical challenges.
- believe that the intrinsic motivation and necessity for Chinese firms to accelerate global expansion could be visualized in three aspects:
- Market expansion and resource acquisition;
- Brand globalization and brand refresh; and
- Diversification of risk exposures and assets.
In my opinion, some Chinese firms hold an absolute dominant position in selected industries globally such as photovoltaic modules, electric vehicles and e-commerce, and most of these companies have already been listed or are planning for an IPO, with established roadmaps in capital markets. Currently, they are proactively expanding into Southeast Asia, Europe, the United States, the Middle East and other markets.
Chinese firms have been able to successfully expand their overseas presence, as most of them are domestic leaders. For example, China has a leading role in the world’s green transition, contributing nearly 70% of the world's production capacity of photovoltaic modules and power batteries, and maintaining its leadership in terms of manufacturing efficiency and cost advantages with the well-established manufacturing industry chain.
Q2: What are the advantages of Chinese firms going global?
Lijun: In the new energy sector, they have strong competitiveness in equipment manufacturing, technology research and development, and project operation, allowing them to actively participate in the competition of the global new energy market and drive the transformation of the global energy structure.
China's manufacturing industry also has outstanding strengths in terms of scale, technology and industry chain, making it an important hub of the global manufacturing industry.
With the global structural transformation and upgrade of traditional industries, high-end equipment manufacturing has been spotlighted around the world, and Chinese manufacturers have been improving product quality, strengthening technological innovation and optimizing supply chain management to further build up their global competitiveness.
With the continuous economic development and industrial structure upgrade in China, some companies in selected emerging industries and sectors may have more urgent financing needs.
While the companies in high-tech, new energy, environmental protection, and pharmaceutical industries, for example, enjoy high technology content and bright market prospects, they need lots of R&D investments and more capital market support. They may be at different stages of development, with diversified and individualized financing needs to expand production scale and achieve industrial upgrade through M&A.
Q3: As one of the biggest international banks, what is UBS’s role while China clients are going overseas?
Lijun: UBS has been dedicated to supporting Chinese firms to expand global presence with its extensive global resources, and has successfully delivered international financing solutions to many clients, including raising capital from overseas investors to support overseas business expansion, and identifying and acquiring ideal overseas acquisition targets.
As a leading global financial solution provider, UBS also plays a key role in this process. We have extensive international service experience and strong expertise with established subsidiaries and offices in more than 50 markets around the world, and have been dedicated to offering a broad and deep range of services and solutions to both Chinese and foreign companies wanting to access international capital markets over the past few years, including:
- Managing IPOs as sponsors / underwriters, helping companies establish overseas financing platforms and expand financing channels to raise funds in foreign currency.
- Assisting Chinese companies listed overseas to secure funding resources for business development through placements, convertible bonds, preferred shares, offshore bonds and other financing solutions.
- Helping A-share listed companies launch GDR offerings in European markets to support their globalization strategy and raise foreign currency.
- Supporting private companies with private financing solutions at various stages to secure funding support from international professional investors and industrial players, and expanding global footprint with overseas strategic partners at an early stage of development.
- Helping Chinese companies to identify and acquire overseas targets to achieve horizontal and vertical expansion in overseas markets for globalization strategies.
For the domestic capital market, UBS Securities is also an active participant in the A-share market including the roll-out of the registration-based IPO system across the board in 2024, with the domestic capital market playing an essential role to support China’s economy to maintain high-speed and high-quality growth. Sun mentioned that companies at different stages of growth may have different funding requirements in terms of size and nature. The companies should establish financing strategies and growth strategies based on their development stages and actual needs, to effectively leverage each round of financing as a springboard for further growth, rather than purely viewing it as a way of monetization or exit.
Q4: Why is Hong Kong among the most preferred markets for mainland-based enterprises seeking overseas financing solutions?
Mandy: Hong Kong has always been an important offshore financing destination for Chinese firms. However, both the Hang Seng Index as the secondary market proxy and the IPO funds raised in the primary market have shrunk in the past two years. This is because:
- The Fed's aggressive rate hikes of over 500bps in just two years.
- The international capital outflows from Hong Kong triggered by geopolitical risks; and
- The new CSRC regulations for filing-based administration of overseas listings coming into effect on March 31, 2023, which has extended the IPO timeline for the listing candidates.
Hong Kong IPO application and review procedures have been significantly reformed over the past year, requiring listing applicants under H-share structure to go through CSRC filing in replacement of the acceptance and approval letters (commonly known as “Xiao Lu Tiao and Da Lu Tiao”). This sort of filing-based regime also becomes a new requirement for the companies seeking IPO under red-chip structure, for which CSRC review was not required before. “In fact, the reform aligns the regulatory requirement for Chinese companies seeking access to Hong Kong market, whether under H-share structure or red-chip structure, which represents a remarkable change”, she added.
More than 60 companies have been approved for listing in Hong Kong since the new regulations came into effect. Therefore, the domestic approval process for listing in Hong Kong has become more normalized and transparent after one year of operation, which is a positive trend. In the future, rules are likely to become clearer, making it easier for intermediaries and companies to manage their expectations of timelines.
Given the corrections experienced by the global capital markets over the past two years and the implications from geopolitical risk exposures and Fed's rate hikes, the Hong Kong market has become even more important for Chinese companies. I believe that Hong Kong is an international capital market where global capital can freely enter and Chinese firms can easily and efficiently access international capital. With the global capital pool, the Hong Kong market is closely linked to the Chinese economy, attracting a group of high-quality investors.
Although the Hong Kong market has shrunk in the past year, it is widening its influence among Chinese firms seeking overseas financing. The Hong Kong stock market has become more efficient in terms of refinancing after new regulations were implemented by CSRC, allowing the issuers to launch refinancing activities in two to three weeks, which is favorable to many fast-growing companies with financing needs. Therefore, it is no doubt that the Hong Kong stock market is still a strategically important destination.”
It cannot be ignored that investor appetites have also changed significantly in recent years. In 2020 and 2021, high-growth companies were favored by many investors given the abundant market liquidity. However, after undergoing major shifts in the market, investors are showing more preference for businesses with stable cashflow and profitability, industrial leadership and a deep moat in their portfolios.
For example, UBS has successfully helped China Tourism Group Duty Free Corporation Limited launch Hong Kong IPO, and executed Anta Sports’ US$1.5 billion Hong Kong placement in April 2023, attracting active investors’ participation. In the future, such types of companies will continue to be favored by long-only international investors.
Q5: How about the US market? Is it still a prioritized market for Chinese firms?
Mandy: In addition to Hong Kong IPOs, China American Depositary Receipts (ADRs) IPOs were very popular in the past decade, however, US IPO offerings by Chinese issuers have slumped significantly due to increased regulatory scrutiny from both countries. Despite this, UBS believes that the US market remains a highly significant market for both IPO and refinancing activities as the regulation becomes normalized.
Chinese companies seeking listings and refinancing activities in the US market experienced challenges from the second half of 2021, including tighter regulatory scrutiny from China and US authorities, continuous market volatility and rising US interest rates, leading to a significant slowdown in financing activities. However, there have been signs of recovery from the first quarter of last year before the market sentiment turned weak.
The positive thing is that about 50 Chinese companies have received the filing notices from the mainland's securities regulator for IPOs in the US since the new regulations for the filing-based administration came into effect in March 2023, including 4 applicants seeking US IPO under complex VIE structure, which is much higher than expected as there were few greenlights for US IPOs with VIE structure as of the third quarter of 2023. Therefore, I also believe that the regulatory framework and channels for cross-border listings are getting clearer.
However, the investment appetite in terms of sectors and growth stage has diverged among the US investors in the recent years, which in turn challenges bankers’ communication skills to market deals in a comprehensive way, and effectively delivers the growth characters, business attributes, development blueprint, IPOs and secondary market performance of peers in the equity story.
Generally speaking, Chinese firms garnered more funds via secondary offerings in the US last year than via IPOs as many renowned companies completed rights issues and sold convertible bonds for their financing needs, which proves that the US market remains a highly significant market.
Q6: What is the significance of GDR to Chinese firms with overseas financing needs?
Mandy: The Global Depositary Receipts (GDR) listing has paved a new way for Chinese firms to seek cross-border listing in the past two years. On July 28, 2022, the China-Switzerland Stock Connect program was officially launched, opening a new overseas financing access for Chinese firms and triggering a wave of GDRs in Europe. In less than half a year, 32 A-share listed companies officially announced their intention to offer GDR, covering industries such as new energy, new materials, high-end manufacturing, healthcare, power, finance, and insurance.
However, GDR financing activities have slowed down since the second quarter of 2023. Zhu indicated then that the guidelines for GDR issuance by domestic listed companies (GDR Guidelines) issued by CSRC had set out specific rules applicable to offering GDRs fungible with domestic underlying A-shares. It was expected that the potential issuers may be more prudent in considering GDR offering.
The GDR Guidelines updated the domestic regulatory procedures from CSRC approval to registration by:
- Allowing GDR offering to benchmark against A-share placement in terms of domestic review process, which is aligned for different equity solutions with new A-shares as the underlying assets.
- Significantly increasing the responsibilities of the issuer and financial intermediaries, leading to longer timeline.
- Aiming to further regulate GDR financing, as most of the GDRs were converted into the underlying A shares for arbitrage previously.
However, industry insiders believe that companies with genuine financing needs abroad will still choose to issue GDRs in the future.
GDRs combine various advantages:
- GDRs can be converted back into mainland-listed shares after 120 days post GDR listing, so the issuance price is linked to the trading price of A-shares. The mainland's stock markets have relatively strong liquidity and offer attractive valuations, resulting in higher financing efficiency of both existing shareholders and the companies with valuation premium over the Hong Kong market.
- A GDR issuance does not increase the class of shares, and it still follows the corporate governance model of A-shares.
However, after the new regulations came into effect in 2023, CSRC emphasized accountability of financial intermediaries, including taking gatekeeper’s responsibilities to allow companies with genuine financing needs abroad to issue GDR.
In fact, the threshold of GDR offering is higher, leading to longer execution timeline and more detailed requirements on execution. While the new domestic review procedure and CSRC registration may affect the pace and number of GDR issuance, GDR products still have intrinsic benefits. There are many successful GDR cases delivering high strategic implications, as many companies have attracted international long-only cornerstone investors through GDR issuance. Therefore, it could provide A-share listed companies another attractive opportunity to access the international capital market.
