China property/KE Holdings: Hong Kong IPO hedges risk of US delisting

SoftBank’s founder Masayoshi Son told his lieutenants this spring to halt any new investment ideas. He has enough on his plate already. A threatened US delisting of SoftBank-backed KE Holdings, parent of Chinese online housing platform Beike, has encouraged Son to list KE in Hong Kong.

Shares of KE, which also controls real estate property brokerage brand Lianjia, rose as much as 8 per cent on its first day of trading on the Hong Kong Stock Exchange on Wednesday, finishing with a market value of $16bn.

The dual primary listing in Hong Kong provides an effective hedge for KE. In April it was added to a list of US-listed Chinese companies that could be delisted if they did not open their books to US auditors. Its US-listed shares, having plummeted 75 per cent in the past year, still trade at 35 times forward earnings, a third of its 2020 levels, reflecting these concerns.

But its shareholders have another worry: China’s faltering housing market. Diminishing property transactions, since last year, have had a direct impact on KE’s platforms. It reported a net loss of Rmb525mn ($82mn) last year.

The market outlook has since worsened. Property sales more than halved in March, marking the ninth consecutive month of declines, even before lockdowns began. With Shanghai in its sixth week of an intensifying lockdown, that data will only worsen.

The Hong Kong listing addresses US delisting concerns and will provide more liquidity from local investors for which KE’s platforms are household names. KE’s dual primary-listing allows it access to not only Hong Kong investors but those in mainland China too, via the Stock Connect program. This allows investors in mainland China and Hong Kong to trade in each other’s market.

At least KE’s platforms benefit from all transactions, regardless of the direction of home prices. Patient investors willing to look past this difficult period will consider KE shares to buy. But most will await more clarity on the Chinese property market.

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