Spurned by New York, Kingsoft Cloud Looks for Love in Hong Kong

Key Takeaways:

• Kingsoft Cloud is studying a possible dual listing in Hong Kong to complement its current listing on the Nasdaq
• Company made the announcement after the U.S. securities regulator reminded U.S.-listed Chinese firms they could face forcible delistings under a law passed in December 2020

By Doug Young

When is a 25% jump in your share price not much cause for celebration? The answer: When your shares have just tumbled 48% the previous trading day.

That’s the latest at Kingsoft Cloud Holdings Ltd. KC, which has just announced it is exploring a potential new listing in Hong Kong to complement its current volatile New York listing. Like all U.S.-listed Chinese companies, Kingsoft Cloud has been sucked into the vortex of an ongoing storm that could see the entire group forcibly removed from the New York Stock Exchange and Nasdaq.

Such an eventuality seems unlikely in our view, for reasons we’ll explain shortly. And even if it comes to pass, it would only begin to happen at the end of 2023 at the earliest under the U.S. Holding Foreign Companies Accountable Act that became law in December 2020.

Still, any responsible company would need to consider the potential for such a drastic eventuality and what to do if it happened, which is what Kingsoft Cloud and many of the other nearly 300 U.S.-listed Chinese companies are now doing. OneConnect OCFT, a New York-listed provider of digital services to banks, announced a similar plan late last month.

Like many of those companies, Kingsoft Cloud likes Hong Kong for a second potential listing due to the city’s easy access to both Chinese and international investors. At the same time, such a listing would provide a backup that could quickly become the company’s primary listing if it was ever forced to abandon its U.S. listing.

“In order to provide our shareholders with greater liquidity and protection amid an evolving market and regulatory environment, we are exploring a dual listing of our ordinary shares on the main board of the Hong Kong Stock Exchange,” Kingsoft Cloud said. “In the meantime, we will keep focused on driving our sustainable development as a U.S.-listed company … Despite recent fluctuations in our stock price, our business operations remain normal and uninterrupted.”

Thank you, Kingsoft Cloud, for reminding us that your stock price and business operations aren’t directly linked!

The reality is that U.S.-listed Chinese stocks have taken a beating from both their home and host governments on both sides of the Pacific over the last year. In 2021, the main source of that beating came from Chinese regulators who launched an unprecedented wave of crackdowns targeting everything from monopolistic behavior to gaming addiction and data security.

More recently, the companies have fallen victim to a U.S. securities regulator that is using the Holding Foreign Companies Accountable Act to remind everyone that the clock is ticking down on a three-year deadline for Chinese companies to comply with the law’s requirements. The central element that’s currently missing is an agreement that would allow the auditors for U.S.-listed Chinese firms to share their records with the U.S. securities regulator’s accounting arm.

Such information-sharing is currently banned by China, which considers the audit records of its companies as state secrets.

Making progress

Despite the current ban, the U.S. and Chinese securities regulators are now in discussions for just such an information-sharing agreement. The U.S. Securities and Exchange Commission (SEC) hasn’t really commented much on progress of those talks. But in a signal to China that the clock was ticking down to a December 2024 deadline, it released a list of five companies that could face potential delisting last week. Kingsoft Cloud wasn’t on the list, but it still got caught up in a resulting selloff for all U.S.-listed Chinese stocks. Its shares fell 57% in the three trading days after the announcement, before the 24% Tuesday rally.

China’s securities regulator has been a bit more talkative on the subject, and shortly after last Thursday’s SEC announcement said it was optimistic that the two sides would reach an agreement. China really has every reason to want such an agreement, since the U.S. is the world’s largest capital market and any stock that trades there is widely available to most investors around the world. What’s more, the information the SEC is requesting doesn’t really pose a national security risk.

Instead of seriously planning to delist these Chinese companies, the SEC is most likely issuing its periodic threats to keep the Chinese regulator at the negotiating table and remind it that the talks can’t drag on forever – a tactic often used by China.

All that said, we’ll spend the final part of this discussion looking at Kingsoft Cloud’s actual operations. The massive investor race for the door has left many of these Chinese stocks extremely undervalued, including some that look quite full of potential if you can forget about politics for a moment and look at their actual business.

Kingsoft Cloud likes to point out that it’s China’s largest independent cloud services provider, which gives it a unique advantage as an impartial supplier over rival services operated by big internet names like Alibaba and Tencent, as well as telecoms giant Huawei.

The company’s latest financials look quite so-so, though most likely for temporary reasons related to the pandemic. Its revenue grew by an impressive 40% in last year’s third quarter to 2.4 billion yuan ($376 million), and it forecast fourth-quarter revenue would grow by a similar 37% to 47%. It will release its fourth-quarter results on March 24.

But the company’s bottom line wasn’t pretty for the quarter, with its operating loss nearly doubling to 469 million yuan from 243 million yuan a year earlier as its gross margin fell sharply from 6.5% to just 3.7%. It blamed the steep margin decline, and resulting big loss, on underutilization of its facilities caused by a number of pandemic-related issues such as inability to visit new and existing clients due to travel restrictions, and project delays due to power shortages.

We won’t bother with the usual valuation comparisons right now, as Kingsoft Cloud’s stock is clearly an extreme bargain when compared with its peers following its 78% drop so far this year. Even if the company is ultimately forced to delist, that won’t mean it doesn’t have any value. And a potential new Hong Kong listing would provide a relatively seamless way for it to relocate its current American depositary shares from their current base on the Nasdaq.