What Caught Our Attention in the Investment World? – Week of May 18 – 22, 2020

By Kuldip K. Ambastha

The American stock exchanges list a variety of companies from all over the world. Restrictions may be soon rolled out for Chinese (and other non-U.S.) companies listed on American stock exchanges, due to the Holding Foreign Companies Accountable (HFCA) Act already passed unanimously by the U.S. Senate on Wednesday, May 20, 2020. If the U.S. House also passes this legislation in the coming weeks and President Donald J. Trump signs it, non-U.S. companies would be required to have the Public Company Accounting Oversight Board oversee audits of corporate financial records before raising money (via stocks or bonds) in the American market. Furthermore, non-U.S. companies will have to adhere to the same investor protection rules which U.S. companies follow. Non-U.S. companies will also have to declare whether they are owned or controlled by a foreign government. All U.S. and most all non-U.S. companies already allow for this to happen, but Chinese companies do not.

Concerns around fraud (accompanied by a lack of transparency in general to start with) by Chinese companies have driven a push for this particular legislation. The fraud seen in the past from non-transparent Chinese companies has inspired this legislation which is driven by a need to extend more rigorous oversight onto Chinese companies. The most recent of these scandals involving Chinese companies has been that of the NASDAQ-listed Chinese company Luckin Coffee (LK) which fabricated its sales numbers.

It is unlikely that non-U.S. companies, seeing this pending legislation, will move to list on non-U.S. stock exchanges. London, Hong Kong, and other places have strong stock exchanges, but the U.S. stock exchanges overall (in aggregate) have the best size, liquidity, depth, trading volume, and so on. However, on Friday, May 22, 2020, the news of this legislation had some notable impacts such as Luckin Coffee (LK) stock dropping by more than 30% to $1.39 / share (having touched its 52-week low of $1.33 / share intra-day). Luckin Coffee (LK) has traded in the range of $1.33 to $51.38 / share in the past 52 weeks. Similarly, Alibaba Group Holdings Limited (BABA) shares dropped by 5.9% on Friday despite a strong earnings report. It was also reported on Thursday, May 21, 2020, that NASDAQ-listed Baidu Inc. (BIDU) is considering de-listing itself from the U.S. market in the wake of this legislation. Baidu (BIDU) shares dropped by 6.1% on Friday, May 22, 2020.

Keywords – American, Chinese, Holding Foreign Companies Accountable Act, HFCA, U.S. Senate, U.S. House, President Donald J. Trump, Public Company Accounting Oversight Board, auditing, investing, protecting, London, Hong Kong.

Disclosure – The clients of Ambastha Financial LLC do not have any positions in LK, BIDU, and BABA. The principals of Ambastha Financial LLC do not have any positions in LK and BABA, but do have stock and option positions in BIDU.

Disclaimer – No recommendations are being made via this post. Past performance is not an indicator of future performance. As an investor, you should do your own research and seek professional advice from a Registered Investment Adviser (RIA). You can lose money by investing in stocks and other instruments. Ambastha Financial LLC does not assume any responsibility (legal or otherwise) for any losses that may occur as a result of actions taken based on this post. All content copyrighted © 2020 – Ambastha Financial LLC.

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