Text | Baker Street Detective, Author | Lu Zhenxi In March 2019, Republican Senator John Kennedy, Democratic Senator Chris Van Hollen and four other congressmen jointly drafted the "Foreign Company Accountability Act" (Part 2) (called the "Act") was submitted to the U.S. Senate f

text | Baker Street Detective, author | Lu Zhenxi

Picture source: muddy waters carson block on short selling

Source: foxbusiness

Source: SMIC’s 2024 Semi-Annual Report

In March 2019, Republican Senator John Kennedy, Democratic Senator Chris Van Hollen and four other congressmen jointly drafted the "Foreign Company Accountability Act" ( (hereinafter referred to as the "Bill") was submitted to the U.S. Senate for review and passed in May 2020.

was approved by the U.S. House of Representatives just 7 months later. Then U.S. President Trump signed Executive Order No. 116-222, turning it into formal U.S. law. In March 2021, the U.S. Securities and Exchange Commission (hereinafter referred to as "sec") passed final amendments to the bill.

Some people once believed that the passage of the bill was the consequences of the financial fraud incident of Luckin Coffee . Judging from the time when the bill was submitted, its drafting time must have been much earlier than the "enterprise part" exposed by Luckin's audit agency Ernst & Young. The starting time of "inflating the company's revenue, costs and expenses during the relevant period through false transactions" is "the second quarter to the fourth quarter of 2019".

It is worth noting that the sponsors of the bill include members of both the Democratic and Republican parties, which indirectly shows that the entire United States has long wanted to strengthen supervision of overseas companies listed in the United States. At a time when the United States is "sharpening its knives", Luckin happened to . Take Chinese concept stocks as an example. Before the bill was proposed, the stock prices of many Chinese companies listed in the United States had already entered a downward cycle, and some companies had already started the process of privatization, delisting, or relisting in Hong Kong.

In order to alleviate the difficulties encountered by Chinese concept stocks in the United States, on August 26, 2022, the China Securities Regulatory Commission, the Ministry of Finance and the U.S. Public Company Accounting Oversight Board (hereinafter referred to as "pcaob") signed a Sino-U.S. Audit Supervision Cooperation Agreement. The agreement The most eye-catching result in the market is to allow the PCAOB to inspect and investigate accounting firms headquartered in mainland China and Hong Kong.

This result coincides with the demands of Republican Senator Marco Antonio Rubio, who participated in the 2016 U.S. presidential election when he proposed the "Fairness Act" in 2018. He once advocated that U.S. regulatory agencies have the right to review The audit report of Chinese companies listed in the United States recommended that Chinese companies that do not comply with U.S. regulatory requirements be delisted.

In 2019, the U.S.-China Economic and Security Review Commission (uscc) mentioned in its report to Congress that the U.S. Congress should enact laws to control U.S. companies with vie (variable interest entities, variable interest entities, also known as "agreement control") Chinese concept stocks listed in the United States in the form of "but no actual business" will be delisted.

As soon as the news came out, the market once thought that it would directly benefit hard technology entity companies. However, Chinese chip foundry SMIC , which was listed on the New York Stock Exchange and the Stock Exchange in March 2004, announced in May 2020: The board of directors passed a resolution on listing on the Science and Technology Innovation Board on April 30. For this listing on the Science and Technology Innovation Board, SMIC plans to issue no more than 1.68562 billion shares, and is sponsored by Haitong Securities and CICC .

followed by SMIC’s 3-day lightning inquiry and became the first “a+h” red-chip company on the Science and Technology Innovation Board. While setting a new record for IPO review, it also pointed out the way out for Chinese concept stocks wandering overseas.

01 The origin of the crisis in Chinese concept stocks

As the saying goes, "There is nothing new under the sun." The crisis of trust in Chinese concept stocks caused by Luckin has already been staged as early as 2010.

Carson Block and Sean Regan, 33-year-old Americans at the time, were counting trucks at the entrance of Oriental Paper, the largest paper mill in Hebei. This move is not a performance art out of boredom, but a task that Carson Block's father, William Block, assigned him to complete. The reason for

was that William Block was bullish on small and medium-sized enterprises and wanted to publish a relevant report to stock managers. Oriental Paper happened to be one of the targets of his observation, because the company not only has high output, but also has an inventory turnover rate that is more than twice that of its peers. Very growth-prone. Unfortunately, Carson Block found out through investigation that the data was untrue and that Oriental Paper had inflated revenue and misappropriated funds.

So I discovered that instead of going long on Oriental Paper, the carson block of "Huadian" went back to short Oriental Paper with the help of the newly established "Muddy Waters" company, and provided support for all "China Concepts" "stock" brings a crisis of trust.

In December 2010, sec and pcaob launched a special investigation into Chinese concept stocks. The former criticized the backdoor listing behavior of Chinese concept stocks. In 2011, 22 Chinese companies were sued. In 2012, they began to investigate the vie structure of Chinese concept stocks. More than 50 Only Chinese concept stocks were suspended or even delisted due to financial problems. For a time, no Chinese companies went to the United States for IPOs. Even if Vipshop landed on the US stock market in March 2012, it immediately broke through. The stock price closed at US$5.5 on the first day, which was far from the issue price. 6.5 US dollars, a drop of more than 15%.

The SEC then targeted the four major audit firms including Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers. In 2012, it sued the Big Four and Dahua on the grounds that the above five companies violated the U.S. Securities Exchange Act and Saban The Sarbanes-Oxley Act stipulates that foreign public audit institutions failed to provide audit information and related documents to the SEC's investigation of Chinese companies suspected of defrauding American investors as required.

The famous Big Four accounting firms were unable to resist the pressure and shut down all businesses of Chinese companies that had "backdoor" access to the U.S. stock market. Among them, Deloitte was included in the prosecution list by investors who suffered heavy losses because it helped another Chinese concept stock company, China Express Channel, which had committed financial fraud to go public through a backdoor listing.

In this regard, PricewaterhouseCoopers, Ernst & Young, and Deloitte publicly stated that sec's actions are the result of legal conflicts between China and the United States. They look forward to the continued dialogue between the relevant regulatory agencies of the two countries to finally reach an agreement to resolve this issue.

In August 2011, then-U.S. Vice President Biden made it clear during his visit to China, “We hope that the United States can have active policies to eliminate protectionism in trade and investment as soon as possible, including relaxing the export of high-tech products to China and China’s The restrictions on U.S. investment create a fair investment environment for China.” At this time, the U.S. government’s strategy towards Chinese concept stocks is still moderate and relatively rational.

In 2013, China and the United States signed a "Memorandum of Understanding on Law Enforcement Cooperation" on the auditing of Chinese concept stocks, establishing a cross-border regulatory collaboration mechanism. PCAOB can request audit manuscripts through Chinese regulatory agencies, and the United States has also obtained audit manuscripts through this collaboration mechanism. . In other words, the accountability bill currently promulgated by the United States is essentially an upgrade of cross-border regulatory requirements. The demand for audit papers has been upgraded from "requesting assistance" to "reading at any time." It is hoped that this will reverse the attitude of U.S. investors towards Chinese concept stocks. Feeling of distrust.

Unfortunately, Biden did not know that this memorandum would become an important tool for his opponents to criticize him during the intra-party campaign in the 2016 presidential election. From a factual point of view, the signing of the memorandum directly pushed up the number of Chinese concept stocks listed. I wonder if it was because of the signing of the memorandum that Biden lost the 2016 intra-party primary competition.

During Trump’s term, the SEC’s restrictions on Chinese concept stocks continued to increase. On April 23, 2020, Jay Clayton, Chairman of the U.S. Securities and Exchange Commission (SEC), said in an interview with the media that due to information disclosure issues, When investors adjust their positions in the near future, they should not invest funds in Chinese company stocks listed in the United States.

In fact, although the number of IPOs by Chinese companies in the United States has increased steadily since 2013 during Trump’s term, it is significantly lower than that during Biden’s term. However, contrary to the number of listings, during Trump’s term, China’s IPO The stock rally is significantly stronger than during Biden's term.

02 The trend of listing in the United States is still there, but the stock price is on a roller coaster, and delisted companies

During Trump’s term, the most Chinese companies listed in the United States was the year when he was in trouble and was about to lose re-election. In 2020, the number reached 34. During Biden's term, the number of Chinese companies listed in the United States increased to 47 in 2023. According to a report released by Deloitte, in the first three quarters of 2024, the number of domestic companies listed in the United States was 36.

There is a renewed trend of Chinese companies listing in the United States. The market generally believes that financing is only a superficial demand, mainly because companies listed in the United States allow different rights for the same shares, and the founders of the company can retain voting rights higher than the proportion of equity; and in China, there has been a long time Loss-making companies are not allowed to go public for a period of time. Even if it is currently allowed, the requirements are very high. Most companies cannot meet the demand and cannot launch an IPO. At the same time, VIE companies and offshore companies are not allowed to go public, so many similar companies have become listed in the United States. Just needed.

Judging from the current market, Chinese companies listed in the United States are mainly concentrated in the three major industries of technology, consumer services and finance. Most of their business scope focuses on the domestic market, and a few companies extend their business to emerging markets. In terms of the growth rate of

, as of November 1, 2024, among the top 20 companies in China Concept Stock Market by market value, excluding two companies that were not listed during Trump's term, the highest growth rate was Bilibili , reaching 992.40%. However, during Biden's term, its decline reached 80.77%. Among the 18 companies listed during Trump's term, the average increase reached 229.82%. During Biden's term, the average decline of 20 companies reached 35.47%. During his tenure, only the newly listed Amer Sports and Ctrip's stock prices rose, while the stock prices of other companies showed a downward trend. The largest decline was Weilai, which reached 91.05%.

The reason for the general decline in Chinese concept stocks during Biden’s term is more obvious, that is, the risks of Chinese concept stocks have been repeatedly amplified. Among them, companies listed in the form of vie are the most typical. Such companies that are controlled through agreements rather than equity have been questioned by regulatory authorities. vie" is legal; whether the shareholders of entities operating in China will violate the contract and confiscate the company's profits; whether the shell company has the investment value it advertises; whether the disclosure is sufficient; whether there is accounting fraud; whether the privatization price is low and other issues.

The above-mentioned various reasons have caused the stock prices of Chinese concept stocks to continue to fall. The market generally believes that the stock price decline of Chinese concept stocks has become irrational, and the decline is inconsistent with the development of corporate performance.

According to the financial report released by the company, Jingdong Group’s revenue in the second quarter reached 291.4 billion yuan, a year-on-year increase of 1.2%; the revenue in the first half of the year reached 551.4 billion yuan, a year-on-year increase of 3.9%. In the second quarter, the non-GAAP net Profit reached 14.5 billion yuan, a year-on-year increase of 69%, and the net profit margin reached 5% for the first time, exceeding market expectations.

According to the first quarter financial report of fiscal year 2025 released by Alibaba , the company’s revenue was 243.236 billion yuan, a year-on-year increase of 4%, and operating profit reached 33.801 billion; the second quarter financial report of 2024 released by shell showed that the company Net revenue was 23.4 billion yuan, a year-on-year increase of 19.9%. The gross profit margin was 27.9%, and the net profit reached 1.90 billion yuan, a year-on-year increase of 46.2%.

Against this background, many asset management giants began to increase their holdings of Chinese concept stocks. According to U.S. stock holding data submitted by asset management companies to the SEC at the end of the second quarter of this year, Appaloosa Management Company, owned by hedge fund manager David Tepper, increased its holdings in Beike, JD.com, etc. in the second quarter. , Alibaba remains the fund’s top holding.

The market value of Gaoyi Asset's positions in the second quarter increased by 37.68% from the previous quarter. Pinduoduo, the largest holding, increased from 447,000 shares to 1.585 million shares, and the number of shares held increased by 39% from the previous quarter. Huazhu, the third largest holding in the first quarter, in the second quarter It added 1.458 million shares, becoming the second largest holding in the second quarter.

Hillhouse's fund management platform hhlr advisors held a total of 85% of Chinese concept stocks in the second quarter, with a total market value of approximately US$4.054 billion. It held more than 6 million shares of Beike, making it its fourth largest holding.

However, while various private equity firms are increasing their positions in Chinese concept stocks, Biden’s crackdown on Chinese companies has not ended. Executive Order No. 14105, signed by him on August 9, 2023, "On Resolving U.S. Targets of Certain Countries in Certain Countries" "Executive Order on Investment in Certain National Security Technologies and Products" was issued on October 28, 2024. This order prohibits or restricts specific U.S. investments in China in fields such as semiconductor and microelectronics technology, quantum information technology, and artificial intelligence. Will take effect on January 2, 2025.

This order inherits the regulatory framework of anprm and nprm, strengthens some substantive provisions and expansions in nprm, and adds penalties for violating the order. In fact, since the introduction of this restriction in 2023, many US dollar investment institutions have Be independent and try to avoid possible risks. The reason why

and these private equity companies have separated their Chinese businesses is very simple. Since 2024, the U.S. dollar interest rate cut has finally become a reality. At the same time, restrictions on foreign investment access in China’s manufacturing sector will be fully lifted from November 1, 2024, and services will be expanded in an orderly manner. Overseas capital, which is opening up its industrial sectors to the outside world and seeking to maximize profits, will naturally not easily miss the opportunity to invest in China.

03 With Trump on the left and Sister Haha on the right, are Chinese concept stocks inevitable?

Although foreign-funded institutions are racking their brains to continue to increase their investment in China's economy in compliance with regulations, the US corporate strategy towards China has long been irreversible. The Republicans and Democrats had already joined forces to suppress Chinese concept stocks when they drafted the "Foreign Company Accountability Act."

Since the second quarter of 2021 to the present, the stock prices of Chinese concept stocks have generally fallen. Short-selling institutions like Muddy Waters, known as "China concept stock killers", have become popular. Are Chinese companies listed in the United States inevitable? In fact, SMIC and 360, two technology companies that have been included in the entity list by the United States, have long given the answer to Chinese concept stock companies, that is, privatization and listing in China.

One year before SMIC returned to A-shares, the valuation of Hong Kong stocks in 2019 was US$5.46 billion, and the US stock market value was only US$555 million, a gap of nearly ten times. As a top 5 wafer foundry in the world, it is also the only one that continues to catch up with TSMC's advanced technology. The US stock valuation of the wafer foundry with process technology is obviously unreasonable.

Faced with the unreasonable valuation of U.S. stocks, SMIC (688981.sh) actively promoted the privatization process and continued to expand in the United States with the help of favorable policies such as the red-chip structure launched by China at that time, simplifying the return process, and lowering listing requirements. Against the background of severe sanctions against Chinese semiconductor companies, it officially landed on the Science and Technology Innovation Board in July 2020. The stock price reached a maximum of 107.76 yuan per share in 2024, an increase of 216.13% from the issue price.

With the help of A-share financing, SMIC quickly implemented the company's strategic layout. From 2020 to 2022, revenue increased by 24.77%, 29.70%, and 38.97% year-on-year, respectively, to 49.516 billion yuan, and net profit increased by 141.52% and 147.75% year-on-year respectively. %, 13.04%, reaching 12.133 billion yuan.

SMIC's revenue in 2023 will drop by 8.61% year-on-year due to various reasons, and its net profit will decrease by -60.25% year-on-year. In the first half of 2024, its revenue will increase by 23.2% year-on-year, and its net profit will continue to decrease by -45.07% year-on-year. The proportion of revenue from China increased to 80.9%.

SMIC attributed the change in the company’s gross profit to “due to changes in product mix and increased depreciation in this period.” There are also views in the market that it is due to the intensification of overseas blockades against Chinese chip companies, which has led to China Semiconductor company profits fell.

However, in the context of declining net profits, SMIC’s valuation has repeatedly hit new highs, which fully proves the market’s recognition of its current market share and corporate operating conditions.

As the final results of the US election are approaching, whether Trump or Harris takes office, their governing strategies and ultimate directions are the same, that is, to continue to increase sanctions on Chinese companies and further intensify the suppression of Chinese concept stocks. When When Chinese concept stocks listed in the United States are inevitable, you might as well consider privatization and return to A-shares or Hong Kong stocks. After all, private equity holding US dollar investments are pouring into A-shares through various compliance means.

According to data from the Financial Associated Press, as of the end of the third quarter, a total of 39 foreign-funded institutions held A-shares through QFII, involving a total of 761 listed companies. Goldman Sachs (including Goldman Sachs Group and Goldman Sachs International) holds the largest number of A-shares, reaching 361 stocks, with a total market value of 5.045 billion yuan. In the third quarter, a total of 251 new listed companies entered the top ten tradable stocks list; Morgan Stanley held a total of 222 A-shares through QFII in the third quarter, ranking second, with a market value of 5.114 billion yuan.

It can be seen that there is no need to worry that the company's listing on the exchange will affect its attention. As long as the company has investment value, funds will be actively invested.

References:

1. Liu Feng, Nie Tianqi; Why Chinese concept stocks are still keen to list in the United States, and how to get out of the predicament in the future
2. China International Finance Securities; A-share investment strategy Weekly special topic: When will foreign investment trend the deployment of "RMB" assets
3. Zhao Yahui; Research on legal issues in the audit supervision of Chinese concept stocks from the perspective of the U.S. "Foreign Company Accountability Act"
4. Financial Associated Press; What stocks do Morgan Stanley and Goldman Sachs hold? A shares? Some foreign investors have become "strong predators" and have ambushed them before the surge.

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