China is considering introducing more requirements for domestic issuers that sell global depositary receipts overseas, after an increasing number of Shanghai and Shenzhen-listed companies announced such plans.
According to market participants, regulators are looking to set criteria including the number of years a potential issuer has been listed in the A-share markets and a minimum fundraising size for GDRs. Some companies are understood to have put their plans on hold as they await the new rules.
“There is speculation that there might be a three-year period which requires Chinese issuers not to undertake a GDR listing within three years of listing in the mainland, and a one-year period for tech companies listed on the Star market,” said Ivy Wong, a partner at Baker McKenzie in Hong Kong and chair of the firm’s capital markets practice group in Asia Pacific.
A banker who focuses on GDR listings said the period under discussion is around two to three years, while a banker in Beijing said it has not been decided yet but the relevant rules should be released soon.
GDR offerings have picked up pace since China last December allowed Switzerland and Germany to join the Shanghai-London Stock Connect trading link to establish closer ties to European capital markets. It also extended the eligibility criteria to some Shenzhen-listed companies.
So far this year, six A-share listed Chinese companies have sold GDRs in Switzerland and one in London. At least 18 Chinese issuers are planning to sell GDRs in Switzerland or London, with the latest Swiss GDR listing plan coming from Shenzhen-listed Shanxi Meijin Energy, which produces coke, coal and natural gas for iron and steel companies.
“There are some GDR deals in the pipeline for Switzerland. It’s a good venue for offshore fundraising for A-share companies with relatively good prices and quick process compared to Hong Kong," said Wong. "London has gained growing interest and Frankfurt has potential too. Some issuers seem to be holding off at the moment in case there are policy changes.”
No liquidity
Currently, Chinese issuers intending to issue GDRs mainly need to satisfy the listing requirements of the stock exchanges they plan to list on. The key requirement set by Chinese regulators is that an issuer prices the GDR at a discount of not more than 10% to the 20-day average closing price of its stock before a deal is launched.
Bankers have been complaining that the discount cap has made GDRs less attractive, especially in volatile markets, and say they hope the regulator will consider allowing a larger discount.
“Most of the GDRs done this year were sold to A-share or Chinese investors as the tight discount failed to attract international investors," said an ECM banker. "The liquidity of the stock dries up quickly as most of those investors just buy and hold, and convert the GDRs into A-shares after the first 120 days of trading.”
Low liquidity is likely the main reason Shanghai-listed lithium-ion battery materials maker Ningbo Shanshan chose to raise up to Rmb6bn (US$834m) from an A-share private share placement, instead of a GDR follow-on, three months after its US$319m GDR listing on the SIX Swiss Exchange in July.
There has been no trading in Shanshan’s GDRs since they were listed on July 28.
A person close to Shanshan told IFR that the company decided to tap the A-share market after it failed to raise what it targeted from the GDRs.
“The market environment at the time [of the GDR sale] was bad and the company's share price also fell, so it did not raise enough money in the end,” said the person.
Shanshan had approval from the China Securities Regulatory Commission to offer up to 64.3m GDRs but it eventually sold just 15.4m.
The company plans to offer up to 671m shares, or 30% of current shares, in the private placement to fund the production of lithium battery materials and for working capital.