Chinese tech groups set to boost country’s listless CDR market


Two big tech groups are set to give a shot in the arm to the market for Chinese depositary receipts (CDRs), once feted by Beijing as the premier channel for fast-growing companies to sell shares in mainland China.

The planned offerings on Shanghai’s tech-focused Star Market for artificial intelligence start-up Megvii and computer maker Lenovo would mark the first big companies to list via CDRs since they were launched to fanfare nearly three years ago.

The announcements also come as Washington has tightened scrutiny on Chinese groups that trade in New York, including legislation that could force delistings and sanctions that ban US investment.

Megvii, a facial recognition company, had previously tried for a public listing in Hong Kong. It cut its fundraising target from $1bn to $500m, before abandoning the offering altogether last year against a backdrop of US sanctions.

The company was added to the US commerce department’s entity list in 2019 on grounds of alleged human rights abuses in China’s Xinjiang region. Megvii has said it did not generate any revenue from Xinjiang in the six months to June 2019.

A filing made public on Tuesday said Chinese state-owned Citic Securities was working with Megvii on a listing, the first step in a months-long process. The group did not say how much it is looking to raise.

Meanwhile, the Hong Kong-listed shares of Lenovo jumped as much as 17 per cent to their highest level in more than five years on Wednesday. Lenovo said it would issue up to 10 per cent of its enlarged share capital in the CDR offering.

CDRs were announced in 2018 with the hope of luring back to the mainland Chinese tech groups that trade in New York via American depositary receipts, which have been used to raise billions of dollars on Wall Street. The CDR system was partly meant to allow Chinese tech companies to sidestep issues such as the use of variable interest entities, which were otherwise not permitted on mainland exchanges.

But the first significant attempt to issue CDRs by smartphone maker Xiaomi fell apart in the face of regulatory demands from Beijing.

The only company to successfully list using CDRs is Ninebot, the owner of two-wheel vehicle maker Segway, which raised Rmb1.3bn ($200m) on the Star Market in October. Many large Chinese tech groups trading in the US have instead opted for secondary listings in Hong Kong.

Analysts said there were drawbacks to selling equity via CDRs. Ninebot faced a lengthy approval process due to regulatory requirements.

“There are lots of technical difficulties and uncertainties with CDR issuance,” said Bruce Pang, head of research at investment bank China Renaissance.

CDRs cannot be swapped like-for-like with shares in the same company that trade on an offshore venue, Mr Pang added, and they can also attract higher custodial fees.

On the plus side, he said, trading and issuance of CDRs is available to UK-based investors through the Shanghai-London Stock Connect scheme.


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