Deutsche Bank analyst Edison Yu's team offers the best explanation we've seen.
US-listed Chinese electric vehicle makers - Nio (NYSE: NIO, HKG: 9866), Xpeng (NYSE: XPEV, HKG: 9868) and Li Auto (NASDAQ: LI, HKG: 2015) all saw their shares plunge on Thursday as investor concerns about delisting risk resurface.
Some investors are wondering why the three companies, which are now dual-listed in the US and Hong Kong, are still being hit by delisting risk. Could they simply move all of their shares traded in the US to Hong Kong to avoid the risk?
In a research note sent to investors on Thursday, Deutsche Bank analyst Edison Yu's team provided the best explanation we've seen.
The reality is that even though most large-cap US-listed Chinese companies, including Nio, Xpeng and Li Auto, already have dual listings in the US and Hong Kong, the US still offers materially more liquidity than Hong Kong, according to the note.
"For example, XPEV/LI both typically trade at least 4-5x more value per day in US relative to HK. Therefore, while Asia-based investors may better appreciate the fundamental story (especially on a relative basis since the government cracked down on internet platforms), there is mechanically not enough capital in the near-term to absorb the US/European investors exiting/reducing positions," Yu's team said.
At the same time, despite the help of the Mainland-Hong Kong stock connect mechanism, there is limited capital from the Chinese mainland flowing into Hong Kong stocks at this stage, according to the team.
Xpeng was recently included in the mechanism, and Li Auto is expected to be included this month.
It is also very difficult for these companies to make a listing in the local A-share market, given the stricter requirements, according to Yu's team.
What does this situation mean for investors? The note concludes:
All in all, we are left with a structural constraint on the investor base where bullish investors abroad can push these stocks up in the near-term for "fundamental" reasons (e.g., monthly sales or earnings) but there is rarely any follow through and every negative regulatory headline reinforces the notion that these stocks are just plain "uninvestable" in the US.
Ultimately, as more shares get converted and reallocated to Hong Kong H-shares, will this help? Yes, but the process will likely be quite volatile along the way.