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Why a primary listing in Hong Kong matters for Alibaba, BiliBili

What are reasons for such a switch?
Image: Gilles Sabrie/Bloomberg

The decision by Alibaba Group to change its listing status in Hong Kong to “primary” from “secondary” is a move similar to that taken by other companies in the Asian hub recently and might spur others to do the same. What are reasons for such a switch?

1. What is a primary listing?

It refers to the main stock exchange where a public company’s shares are traded. In order to list, a firm has to fulfill requirements of that market. Secondary listings, often subject to less-stringent regulation, offer a separate trading venue that may increase liquidity in trading of the shares and provide access to a wider pool of investors — a key in the case of Hong Kong.

2. Why are US-listed Chinese companies switching status in Hong Kong? 

It’s a necessary step to gain access to the Stock Connect program that links the Hong Kong bourse with the Shanghai and Shenzhen exchanges, which will expand access to investors in mainland China. The move is increasingly important because US-listed Chinese companies are under intense scrutiny by US regulators. If a company is eventually forced to de-list in New York, its Hong Kong stock may already hold primary status. Among the pioneers with dual-primary listings in Hong Kong are electric-vehicle makers XPeng Inc. and Li Auto Inc. Still, companies also need to meet other criteria related to their listing-period abroad and market capitalisation to be included into Stock Connect.

3. What’s needed for the change? 

A dual-primary listing is often more costly and requires stricter reporting rules than a secondary listing. Additional expenses and items include those related to administration, disclosure and compliance. When firms decide to make the switch from secondary to primary, they must provide the exchange with a schedule of when all requirements will be met, a detailed plan of execution and a plan for rules compliance, among other things.

4. Who could come next?

For most dual-listed companies, liquidity in their Hong Kong stocks currently remains low relative to the US-listed peers. Still, the prospect of an influx of investment from mainland China will likely spur more firms to make the pivot. Online-entertainment provider Bilibili Inc. said in May it will convert its Hong Kong listing to dual-primary status from secondary by early October. Online marketplace JD.com and video-games firm NetEase Inc. are others with secondary listings in the Asian city that could opt to make the change.

5. Are there barriers for secondary or primary listings? 

Any firm seeking to switch listing status must comply with related requirements in Hong Kong. For those planning a secondary listing, some particular rules apply. For example, Chinese firms without weighted voting rights and already listed in the New York Stock Exchange, Nasdaq or the London Stock Exchange’s main market need a market capitalization of at least HK$3 billion ($382 million) and five years of listing history with good compliance. That period is lowered to two years if the market value exceeds HK$10 billion. If the applicant has weighted voting rights, the minimum is either HK$40 billion or HK$10 billion combined with revenue of at least HK$1 billion for the most-recent audited fiscal year.

6. Can firms with weighted voting rights have a primary listing? Does the switch impact shareholders? 

Since January, it’s been possible for Chinese firms that have weighted voting rights and use the variable interest entity structure to convert to a primary listing or switch to dual-primary status. VIEs provide some flexibility in asset reporting and ownership interest, and were popular among China’s internet companies that listed in the US. The switch from secondary to primary, in general, does not impact shareholders.

© 2022 Bloomberg

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