The situation surrounding Didi is now pretty much a doomsday scenario. Investors’ worst fears have indeed come true and this may very much be the spark that ignites a series of F.U.D (Fear, Uncertainty & Doubt) for any U.S. Listed Chinese Stock.
As a shareholder of BABA and NIO, this is of great concern to me, I believe many of you would have the same worries on their minds.
In most cases, any talk of delisting is usually seen as a bearish move and markets usually react accordingly. Given how the Didi saga is unfolding, let’s take a look at the circumstances and our available choices should Didi ignite a cascade of delisting events.
In this article, I will address 4 different outcomes which could happen to any US Listed Chinese Entity, using Didi as an example.
I will avoid the use of any acronyms such as VIE (Variable Interest Entity) or ADRs (American Depositary Receipts) as much as possible.
If you’re new to the topic, you may read some of these articles which may provide more context to the topic which I am discussing today:
- Will China’s stocks ever recover? Here’s what the charts say
- China market sell-off: Why I am holding on
Scenario 1 – Share Buy Back
A share buyback means that the company will buy its shares back from you (and all other investors) at an agreed price.
Usually, a private group will tender an offer for a company’s shares and stipulate the price it is willing to pay. If a majority of voting shareholders accept, the bidder pays the consenting shareholders the purchase price for every share they own.
How Does Privatization Affect a Company’s Shareholders?
For most retail investors, we usually do not influence the offer price. We’ll just have to accept it as it is.
So you must be wondering, “If I have 10 Didi shares that I bought at $10/share, how much will Didi pay me if they decide to do a share buyback?”
In this case, there is no typical price or formula for delisting and to my knowledge, specific to Didi, there hasn’t been a price announced yet. However, we can look at past references of delistings, the most recent being the case of Razer.
To sum up, Razer was listed at an IPO price of HK$3.88. They are now offering HK$2.82 per share in their bid to delist. If you are a shareholder who bought it at lower than the offer price then good on you but if you bought in at anywhere higher, how would you feel?
Alvin shares his take here on the Razer delisting where he considers it a huge disappointment. In my opinion, given how the saga is turning out for Didi, I wouldn’t be surprised if such a scenario were to repeat itself.
Scenario 2 – Share Transfer
A share transfer is easy to understand. Company X that’s listed in America, China and Singapore can “transfer” your shares to China or Singapore if Company X were to delist in America.
There are 2 questions commonly associated with Share Transfers:
- What if the company doesn’t have a secondary listing?
If a company doesn’t have a secondary listing, it cannot consider this as an option as there is no other entity to transfer it to.
Hence, in Didi’s case, this is not an option for now, unless they are able to rush their HKEX listing. If we look at other stocks with dual listings such as BABA or NIO, then this may certainly be an option but that leads to the next question.
- How does it affect the price?
As mentioned at the start of the article, any talk of delisting in the media will most likely result in more of a bearish than bullish action for the stock. Hence, it is likely that the price of the stock would fall significantly prior to the months leading up to the actual delisting.
On top of that, a company were to transfer your shares to another exchange, consider yourself lucky if they give you 1 for 1.
Scenario 3 – Limbo
In simple terms, you will continue to own the shares in the company but you cannot trade them publicly. This means that if you have 10 shares at $10/share, nothing has changed you will still have that same qty in your brokerage account. However being unable to trade it publicly means that’s if you try to buy/sell the shares, the trade will most likely be rejected.
As such, to trade these shares, you may have to execute these trades over-the-counter or even P2p? You may have to consider listing them on carousell if you need the cash? Lol jokes aside, any stocks in limbo will mostly likely also experience a significant price decline as of all the options discussed, this is the one that adds the most uncertainty to the future of the company.
An example would be the case of TT INTERNATIONAL LIMITED (SGX:T09) which I still have 1,000 shares in my CDP account, till this day.
Scenario 4 – Cash + Share Transfer (Combination of 1 & 2)
Think of this scenario as a combination of both scenarios 1 and 2. There’s too much uncertainty to decide if it is better of worst but the mechanics may be as follows,
Company A is delisting on US Exchange and could offer shareholders:
- Cash component and
- 1 share in exchange for every 3 shares.
The closest example I can find to this would be the recent SPH acquisition offer where Keppel offered each SPH shareholder the option of all cash (Scenario 1) or cash+shares (Scenario 4).
It (Keppel) is now offering each SPH shareholder the option of an all-cash offer of $2.36, or $2.40 per share, comprising $1.602 in cash and 0.782 of an SPH real estate investment trust (Reit) unit, valued at 79.8 cents apiece.
Keppel says offer for SPH irrevocable, provides shortest time to payout – The Straits Times
What should shareholders do?
In the case of any delisting, it is unlikely that your investment will completely disappear. There will be warning signs and there will be ample time for you to sell your shares even if you have to do so at a significant loss. I hope that no investor would ever have to experience such a scenario as it would most likely result in a losing trade, but it is part and parcel of investing.
While I’m not vested in Didi, I am vested in BABA and NIO. As a result, I am watching this situation very closely to see how other Chinese companies are reacting to this scenario.
It is still unclear how significant the Didi delisting would affect the fate of US listed Chinese companies, but I can conclude with utmost certainty that things have definitely changed and it is our job as investors to keep a keen eye, now more than ever, on the everchanging landscape.