Nasdaq-listed NetEase kicks off Hong Kong stock sale of up to $3bn

Linda J. Dodson

HONG KONG — Game developer NetEase began Hong Kong’s biggest stock sale so far this year on Monday, seeking as much as $3 billion in a listing as the U.S. weighs new rules that would push Chinese companies out of the New York market.

The Nasdaq-listed company is selling 171.48 million shares, or a 5% stake, which would raise $2.6 billion based on the Friday closing price of its American depositary receipts, according to a term sheet seen by the Nikkei Asian Review. The stake to be sold can rise to 5.7% if overallotments are exercised, boosting the proceeds to $3 billion.

The offering follows a similar move by Chinese e-commerce leader Alibaba Group Holding to raise $13 billion late last year in a secondary listing in the city. Online retailer is expected to open its share sale in the city next week to raise about $3 billion.

The flurry of secondary listings in Hong Kong come as U.S. senators last month approved a bill that could force Chinese companies to delist from American stock markets if they fail to comply with the country’s regulatory audits for three consecutive years.

The bill, if passed into law, is likely to accelerate the dual-listing trend in Hong Kong as 29 mainland companies with a total market value of $370 billion are eligible, according to Goldman Sachs.

When the bill become a law, it “could cause investor uncertainty for affected issuers, including us, the market price of our ADSs [American depositary shares] could be adversely affected, and we could be delisted from Nasdaq if we are unable to meet the Public Company Accounting Oversight Board inspection requirement,” NetEase said in a filing to the Hong Kong Stock Exchange.

NetEase set a maximum price of 126 Hong Kong dollars ($16.30), or 6.2% above the last close of the ADRs, for the retail tranche of the offering. However, the final price of the whole offering, which will be determined after the close of subscription on Friday, will most likely be at a discount to the prevailing U.S. price, people familiar with the transaction said.

Alibaba, which saw heavy demand for its secondary listing in Hong Kong, priced shares at a 2.6% discount to the last closing price of its ADRs and 6.4% below the indicative ceiling for retail investors.

NetEase’s ADRs closed Friday at $382.90 each, valuing the company at $49.4 billion. Given that 25 Hong Kong shares constitute one ADR, the offer shares will be valued at HK$118.7 each, based on Friday’s close.

NetEase, is expected to invest proceeds in expansion and other online services, such as music streaming and online education. Credit Suisse, China International Capital Corp. and JPMorgan Chase are among the lead arrangers for the offering.

Chinese tech companies’ secondary listings will boost volumes at the Hong Kong Stock Exchange.

The city, which was the largest listing destination last year — and in seven of the past 11 years — with $40.24 billion coming to market, is fifth so far this year with just $3.4 billion raised, compared with $5.82 billion in the same period last year, according to Dealogic.

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