China deals hit by US blacklist risk
The US government’s decision to blacklist more Chinese companies in the past week has thrown a spanner in the works of a US share sale by a Chinese biotech company and encouraged more IPO candidates to pivot from New York to Hong Kong.
Legend Biotech, a Cayman-domiciled/US-headquartered biotech with operations in China, got caught up in the latest escalation of superpower tensions while marketing a US$300m follow-on of its Nasdaq-listed shares.
Legend launched the offering, amounting roughly to a 4% stake, after the US market close on Tuesday, a day before the Financial Times reported that eight Chinese companies, including drone manufacturer DJI Technology, would be added to a US Treasury investment blacklist.
The report also said more than two dozen Chinese companies, including some biotech firms, were likely to be placed on a different list – this one run by the Department of Commerce – that restricts them from using American suppliers.
The FT's report triggered heavy sell-offs in healthcare shares in Hong Kong and China on Wednesday, with the Hang Seng Healthcare Index sliding 6.9%.
Shares in Hong Kong and US-listed BeiGene also tumbled on their trading debut in Shanghai, opening 8.1% lower and closing at Rmb160.98, 16.4% below the issue price of Rmb192.60. Domestic bankers attributed the plunge to a possible delisting from the US as well as the FT report.
Shares in Legend, a majority owned subsidiary of Hong Kong-listed GenScript Biotech, tanked on Wednesday to an intraday low of US$39.35 before recovering to close at US$41.14, down 15.2%.
“This is obviously a very serious issue and the fact that biotech is entering the political sphere in this way is a bad headline for all companies in the ecosystem,” said Brad Loncar, CEO of biotech investment firm Loncar Investments.
Legend eventually managed to sell 7.5m American depositary shares at US$40 each, or a 2.8% discount to Wednesday’s close, with a big helping hand from GenScript, which bought 30% of the deal. The company also added a risk factor in the offering document, saying media had reported that the US Department of Commerce may add Chinese biotech companies to its entity list and the company's share price could be materially adversely affected.
Morgan Stanley, JP Morgan, Jefferies, Piper Sandler and Barclays were the bookrunners.
But the Department of Commerce on Thursday did not add any Chinese biotech company to its entity list. It only added China's Academy of Military Medical Sciences and its 11 research institutes, accusing them of developing new forms of weaponry including purported brain-control tools.
Growing lists
Apart from DJI, the Treasury also added Megvii, Shanghai-listed Dawning Information Industry, CloudWalk Technology, ChiNext-listed Xiamen Meiya Pico, Yitu Technology, ChiNext-listed Leon Technology and ChiNext-listed NetPosa Technologies to the "Chinese military-industrial complex companies" blacklist that bars US investors from buying shares in these companies.
The US said these companies supported the biometric surveillance and tracking of Uyghurs.
SenseTime Group had already been put on the investment blacklist a week before, forcing the Chinese artificial intelligence company to delay an up to HK$5.99bn (US$768m) Hong Kong IPO.
The company is now looking to relaunch a float of similar size as early as Monday. Some cornerstone investors have dropped out after the blacklisting but the company has tapped Chinese investors and state-backed entities to fill the gap, said people with knowledge of the matter.
“Some [cornerstone] funds have US money and just can’t stay,” said one of the people.
Eight cornerstone investors committed US$450m to the original deal, representing around 59% of the float.
CICC, Haitong International and HSBC remain as sponsors, a fact that surprised some who thought HSBC would have to drop the deal. The three banks are also joint global coordinators and joint bookrunners with CMB International, China Merchants Securities and DBS. There are 11 other joint bookrunners – all Chinese banks.
Among those blacklisted, Megvii and Cloudwalk have both applied for A-share IPOs, while Yitu has withdrawn an A-share IPO application and is looking at a Hong Kong listing instead.
Hong Kong-bound
In related news, the US Securities and Exchange Commission on December 2 finalised rules to implement a law that will force companies from countries that do not allow US audit inspections to delist from American bourses.
The combination of sanctions-linked investment bans and regulatory pressure on Chinese companies to delist poses insurmountable obstacles for China-to-US IPOs.
“The ability for investors to really quantify the risk of investing in China is very difficult today,” Jeff Bunzel, Deutsche Bank’s co-head of global ECM, said in a press briefing on Wednesday.
“We don’t anticipate much China-to-US activity [next year] from an IPO point of view.”
FWD Group, an Asian insurer controlled by Hong Kong billionaire Richard Li, has decided to drop a US IPO after months of trying and turn to Hong Kong, even though this will force it to give up a proposed dual-class share structure that would have granted Li extra voting power.
“The Didi incident has clearly demonstrated the risk one may be facing with a US listing. Listing in Hong Kong is a safer option,” said a person close to the deal.
Chinese ride-hailing giant Didi Global, which was hit by a Chinese cybersecurity probe two days after listing in New York in the summer, said earlier this month it would delist from the New York Stock Exchange and pursue a listing in Hong Kong.
FWD pre-marketed the US float of around US$2bn in October but was questioned by the US Securities and Exchange Commission about its ties to China. The company, which has no substantive operations in mainland China, then added a disclosure in its filing that “it cannot guarantee that the PRC government will not seek to intervene or influence its operations at any time”.
FWD originally planned to list in Hong Kong around the middle of this year but the city’s regulators told the insurer it was not an innovative company and hence could not list in Hong Kong with a weighted voting rights structure.
Li, via PCGI Holdings, currently owns 72.7% of FWD. The US IPO filing had said all shares held by PCGI would be converted to Class B shares with 10 times the voting power of Class A shares.
