Four Chinese companies have recently debuted on the SIX Swiss Exchange (SIX), Switzerland’s principal stock exchange, raising a collective $1.5 billion. And more are in the pipeline.
But as a host of law firms cash in on China’s thirst for liquidity, only time will tell if the broader European equities market can truly be regarded as a lasting funding channel for Chinese companies.
In July, SIX officially launched the Swiss GDR-leg of the China-Switzerland Stock Connect, providing a new offshore source of trading liquidity for stocks listed on the Shanghai and Shenzhen exchanges.
So far, Baker McKenzie, Linklaters, Clifford Chance and King & Wood Mallesons have already benefited from the first wave of companies that have listed on SIX, advising on the issuances of Shanghai-listed Keda Industrial and Ningbo Shanshan, and Shenzhen-listed GEM and Gotion High-tech. Notably, Baker McKenzie and Linklaters were involved in all four listings, advising both issuers and underwriters.
According to Linklaters Shanghai corporate partner John Xu, his firm also provided legal support to SIX on the new rules and advised the bourse on GDR depository and settlement arrangement as well as the coordination mechanism for information disclosure of listed companies under the Shanghai-London Stock Connect program.
Adding to the list of international advisors are Swiss law firm Niederer Kraft Frey and a whole host of Chinese firms, including Llinks Law Offices, Jingtian & Gongcheng, Haiwen & Partners, Kingson Law Firm, Grandway Law Offices, Tian Yuan Law Firm and Kangda Law Firm.
Of the four issuers, new energy vehicle battery maker Gotion drew the most interest, raising $685 million. GEM, Ningbo Shanshan and Keda Industrial Group raised $346 million, $319 million and $173 million, respectively.
While the requirements and process of listing have been said to be less stringent and more seamless on SIX than on the Hong Kong Stock Exchange (HKEX), there are still some key legal issues that need to be addressed, according to international lawyers in China.
One key point at issue is whether the proceeds from SIX raisings can be used for overseas investment projects or construction projects, and to what extent they can be retained overseas.
“At present, the answer to the question is still uncertain. According to current foreign exchange management practices, after the GDR issuance is completed, all proceeds need to be remitted back to China. If clients (issuers) need to use the proceeds overseas, they need to go through the capital exit procedures separately,” said Fan Lingli, a Beijing-based corporate partner at King & Wood Mallesons.
Another area of concern is the coordination of disclosure in the A share market and the Swiss market, since GDR issuers are Chinese companies listed on mainland Chinese exchanges, and many are unfamiliar with Swiss laws and market practice, according to Baker McKenzie Beijing partner, Wang Hang. “They need to learn how to comply with Swiss rules and think about the implication of using Swiss law as governing law of transaction documents,” explained Wang.
Despite the learning curve for Chinese issuers, the new source of fund-raising comes at a critical time of volatility.
The U.S. market has for a long time been recognized as a “home run” for any Chinese company that aspires to a foreign listing. But the American depositary receipt (ADR) market for Chinese issuers has been largely closed off this year as a result of delisting threats due to unresolved auditing agreements between China and the U.S. Securities and Exchange Commission. China’s massive crackdown on data-heavy Chinese companies and their foreign listings, which started last year, has also spooked major tech companies that were looking to launch initial public offerings (IPOs).
The Hong Kong capital market is also suffering from a lull, in part due to the city’s zero-Covid policy, which has negatively impacted investor confidence. Hong Kong’s second-quarter IPO raising this year fell a stark 90% from the year before.
While acknowledging that new funding opportunities in Switzerland may be positive for market sentiment, some lawyers are skeptical. The longevity of the interest in SIX listings is a curious one, according to a senior partner at a Beijing-based law firm.
His skepticism is not unfounded.
China has seen GDR listings before, but European listings have never been particularly successful in sustaining interest from Chinese issuers. In 2018, Chinese home appliance manufacturer and distributor Haier Smart Home Co. floated GDRs in Frankfurt, sealing the first D share IPO on the China Europe International Exchange—a joint venture board in Germany set up in 2015 by Deutsche Borse AG, the China Financial Futures Exchange and the Shanghai Stock Exchange.
After Haier, though, only four other Chinese companies—Huatai Securities, China Pacific Insurance, China Yangtze Power and SDIC Power Holdings—later went public in London through the Shanghai-London Stock Connect scheme, which was launched in 2019.
Additionally, for Switzerland, SIX listings take up only about 10% of all European listings, despite being home to some of the largest European-listed firms by market capitalization such as Nestle. Last year, SIX took on only five IPOs, all of which were from domestic companies.
This compares to more than $12 billion raised by Chinese companies through U.S. IPOs, just in 2021 alone.
But the decision for Chinese companies to list on SIX isn’t so much about the comparison between the U.S. and Swiss markets, Linklaters Xu notes. Four of the new SIX-listed Chinese companies never considered New York as a possible listing venue, though some had considered Hong Kong prior to turning to the Swiss bourse, he said.
According to Baker & McKenzie’s Wang, the Chinese issuers chose SIX over Hong Kong, as the valuation for the shares was not only higher, but the post-listing maintenance fees of SIX were also lower than those of the Hong Kong Exchange.
“The listing process of Swiss GDR is faster and more efficient than (a) Hong Kong IPO,” said Wang. “Moreover, SIX is a good channel to promote the profile and investment value of these PRC companies in Europe, especially for those with an international footprint or in need of funding to fuel their global expansion plan.”
The economic, legal and social stability of Switzerland and the Swiss financial center are also key considerations, Wang added.
More than ten other Chinese companies are reportedly in the pipeline for listing on SIX, including Fangda Carbon New Material, Lepu Medical Tech, Sany Heavy Industry, Will Semiconductor and Eastroc Beverage Group, though some are also considering London and Frankfurt as potential venues.
And with the threat of more than 150 Chinese companies being delisted from New York still looming, SIX may look to welcome more Chinese issuers in the coming months, though King & Wood’s Fan contends it will be a challenging prospect.
“If a company delisted from the United States wants to be listed on SIX, at least for now, first it needs to become an A-share listed company listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange,” said Fan.
According to Xu, in addition to the GDRs, the Swiss and the Chinese stock exchanges are also exploring Chinese Depositary Receipt (CDR) listings, aiming to allow Swiss-listed companies to have secondary listings in China via CDRs.
“Both SIX and Shanghai (and) Shenzhen Stock Exchanges have a long-term view to facilitate the relevant listed companies to have a dual listing in other exchanges,” said Xu. “From (the) Chinese regulator’s perspective, they are more than happy to support the Chinese companies, listed or not, to have multiple options for financing from offshore markets.”
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