Morningstar - Q2 2022 - 27

Those determined to stay local could see
Australia's few remaining infrastructure and utility
assets move into private hands should
valuation discounts emerge again, Shaw says.
" If you look at APA's pipeline network or
Transurban's concessions framework, they're
fundamentally high-quality assets, " she says. " I
know they're a little bit bigger than some of
the ones we've seen taken out. But what we have
seen is consortiums and conglomerates come
together to take them private. Should we
see a value disconnect, then I certainly wouldn't
rule out further activity. "
Lewis Jackson is a reporter and data journalist at
Morningstar Australia.
The oversight board says that preparation of
reliable and independent audit reports is
fundamental to safeguard the interests of
investors and the public. The board turned more
vocal after Luckin Coffee LKNCY, the largest
coffee chain in China, was found to be fabricating
its sales records in 2020. This was a wakeup
call for regulators. Last year, Chinese authorities
initiated a probe on DiDi Global DIDI and data
security. Subsequently, the ride-hailing platform
is voluntarily delisting from the New York
Stock Exchange.
Audit Impasse
ASIA
China
A long-running dispute between the United
States and China over auditing and compliance
standards could lead to the delisting of
some Chinese companies from U.S. stock
exchanges. On March 10, the SEC warned of the
potential delisting for five companies that
are in the middle of the dispute: fast-food chain
operator Yum China YUMC, wafer processing
solution provider ACM Research ACMR, and
biopharma firms BeiGene BGNE, Zai Lab ZLAB,
and HutchMed HCM, which produces
biopharmaceuticals under Hong Kong's CK
Hutchison CKHUF.
At issue is whether these companies have
provided sufficient disclosure and access
to U.S.-approved auditors. The Holding Foreign
Companies Accountable Act, which passed
in 2020, bars securities of foreign companies
from being listed on a U.S. exchange if they
fail to comply with the Public Company Accounting
Oversight Board's audits for three consecutive
years. The rule also requires companies
to declare whether they are owned or controlled
by any foreign government.
The latest move by the SEC could be just the first
round of threatened delistings.
" These five firms were first to be included in the
Provisional List because they were the first
to publish annual reports for 2021, " said Ivan Su,
senior equity analyst at Morningstar. " The
SEC identifies what companies are subject to
delisting as early as when the firm files its
annual report. Therefore, we expect more Chinese
ADRs to be included in the Provisional List
over the next few weeks. "
Under the current provisions of the 2020 act,
forced delisting of Chinese ADRs can start
in 2024, according to Su. " That said, the timeline
can potentially move up by one year if the
accelerate delisting bill is signed into law. This bill
passed the Senate in June 2021 but has yet
to be approved in the House. If this bill is
signed into law, delisting can happen as soon
as next year. "
From the Chinese authorities' perspective,
the request for information may have crossed
a line, triggering national security concerns.
Chinese laws have long forbidden companies from
handing audit working papers to foreign
The escalation of the dispute between China and
the U.S. comes as the Russian attack on
Ukraine has heightened the sensitivity among
investors over geopolitical risks and follows last
summer's moves by Chinese regulators to
clamp down on some of the country's biggest
internet companies. That action, combined with
the accounting dispute, sent prices of many
Chinese stocks listed on U.S. exchanges tumbling.
regulators on the grounds that they constitute
" state secrets. "
" The data collected by these companies are not
even directly associated with national secrecy
and seemingly unrelated to politics, too, "
according to Chelsey Tam, a Morningstar senior
equity analyst covering the Chinese tech sector.
She says, for example, that online recruitment
company Boss Zhipin BZ and truck-hailing
mobile app Full Truck Alliance YMM were also
under investigation for suspected breaches
of national security and cybersecurity laws. Both
companies sought an initial public offering
in New York in 2021.
Su sees only a " remote chance " that Chinese
companies will be delisted from the U.S. stock
exchanges, because the two countries are actively
working to resolve this current challenge.
" We started seeing signs of the U.S. and China
working together to resolve auditing challenges, "
he says, citing a discussion between the
countries' regulators in December. " Progress is
getting made, evidenced by a Jan. 29 comment
by the vice chairman of the China Securities
Regulatory Commission, who stated that 'China
and the United States were making progress in
coordinating regulations governing Chinese
companies listed in New York, and there could be
a 'positive surprise' by June or earlier.' "
Su also notes that " most of the Chinese ADRs
under Morningstar's equity research coverage
have a fungible dual listing in Hong Kong,
and investors can convert their U.S. shares into
shares listed on the Hong Kong bourse. " However,
risks might be derived from the trading volume
and liquidity issues that would ensue. " A
majority of the trading of these Chinese ADRs
currently takes place in the U.S., " says Su.
" For instance, more than 90% of the trading volume
of Yum China comes from the U.S. bourses, so
investors with large positions may have concerns
regarding future liquidity. "
Kate Lin is a data journalist at Morningstar based in
Hong Kong.
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