China Equities: All eyes on China

For much of the past month, the eyes of the world have been on China, where the ruling Communist Party has been holding its 20th five-yearly party congress in Beijing.

However, the economic backdrop to the congress has not been as favourable as Xi Jinping, whose appointment for a third five-year term as Communist party general secretary was due to be rubber-stamped after this article went to press, would have liked for the party’s showpiece centenary event.

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Why China’s Startup Investors Depend on U.S. IPOs

China’s tech startups have received billions in private financing over the past two decades, with some of those companies going on to make warmly received public market debuts. In 2014, Alibaba had the largest initial public offering in history, raising $25 billion on the New York Stock Exchange. Bilibili, a youth-driven streaming giant, saw its price soar tenfold within three years of its March 2018 listing on the Nasdaq.

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Statement on Agreement Governing Inspections and Investigations of Audit Firms Based in China and Hong Kong

Today, the Public Company Accounting Oversight Board (PCAOB) signed a Statement of Protocol with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong.

This agreement marks the first time we have received such detailed and specific commitments from China that they would allow PCAOB inspections and investigations meeting U.S. standards. The Chinese and we jointly agreed on the need for a framework.

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The Turnaround in Reviewing the Audit of the U.S.-Listed Chinese Stocks

October 31, 2022

The U.S.-listed Chinese Stocks, which have been plagued by regulatory and audit issues as well as the impact of the overall market environment over the past year, may experience a turnaround in the near future.

Let's briefly review the whole background first. The Public Company Accounting Oversight Board (PCAOB), a self-regulatory organization in the accounting industry, was formed under the Sarbanes–Oxley Act (SOX) of 2002 to protect the public interest by overseeing the audit work of public issuers. In December 2020, the Holding Foreign Companies Accountable Act (HFCA Act) was passed in order to require foreign issuers to satisfy the requirements of SOX and related PCAOB standards.

This new regulation targets registered public accounting firms located in the foreign jurisdiction that the PCAOB has determined it is unable to fully investigate due to the position taken by the political authority. In addition, the SEC requires those U.S.-listed foreign companies to clarify that they are not owned or controlled by government entities in that foreign jurisdiction and to disclose in their annual report about their audit arrangements and whether or not the foreign government exerted any influence on them. For many years, the PCAOB has maintained a "Denied Access List" of accounting firms. At present, there are only accounting firms located in mainland China and Hong Kong on the list. Since the PCAOB is able to conduct audit inspection anywhere except the aforementioned two regions, it is widely believed that the HFCA Act was created specifically for China.

Chinese regulators had not allowed external audit monitoring for years, arguing that it would threaten national security if audit papers and other data could be freely reviewed by outsiders. YJ Fischer, the director of the SEC’s office of international affairs, commented that such a statement cannot hold. In early 2022, the SEC began publishing a list of public Chinese companies whose accounting firms located in foreign jurisdictions that could not be inspected or reviewed based on the PCAOB reports. So far the total number of companies on the list has exceeded 160. If the PCAOB fails to conduct inspections of these companies' accounting firms for three consecutive years, their securities will be banned from trading on the U.S. exchange.  About 200 Chinese issuers will face such a fate if their accounting standards remain unchanged. The series of moves have forced some U.S.-listed Chinese companies to replace their auditors with firms based in the U.S. or elsewhere.

In August 2022, the controversy surrounding the PCAOB’s audit requirements for public Chinese companies finally settled. After the Chinese side made concessions, auditors from the PCAOB in the United States and relevant personnel from mainland China went to Hong Kong on September 19 to start reviewing the original audit files of some predetermined companies. The first batch of Chinese companies selected by the PCAOB are mainly Internet companies, such as Alibaba (NYSE: BABA), Baidu (NASDAQ: BIDU), JD (NASDAQ: JD), and NetEase (NASDAQ: NTES). According to the SEC Chairman Gary Gensler, the whole process will take 8 to 10 weeks to complete, or the inspection results will be available around early December this year. The Chinese government also stated that they would abide by the agreement between the two countries throughout the whole process. Goldman Sachs speculates that the reconciliation between the two countries on the audit issue marks that the probability of the U.S.-listed Chinese stocks being forced to delist from the market has dropped from 95% in March to 50% today; also, the overall price–earnings ratio of these shares will increase by 11% if the delisting risk can be completely eliminated.

When everything is moving in a good direction, a couple new problems have also arisen. Paul Munter, the SEC’s principal advisor to the Commission on accounting and auditing matters, is concerned that auditors from external jurisdictions may not understand local business management in China and Hong Kong, have difficulty reaching company management or have language barriers. These obstacles could prevent overseas auditors from performing their duties within the scope of PCAOB requirements, resulting in the final audit work being outsourced to local auditors. Thus, he requires these auditors to assume responsibility for oversight, recording and review while adhering to PCAOB responsibilities and constraints

Businesses around the world are still struggling with the impact on narrowing profit margins and slowing sales growth caused by high inflation and the rising dollar, far more severe than the financial crisis of 2007-2008. The weakness in the stock market has also deepened the pessimism in the market, with analysts at many financial institutions speculating that an upcoming recession is inevitable even though the September employment report in the United States remains strong. Coupled with the recent announcement by OPEC to cut production by 2 million barrels per day, which is also the largest production cut decision since the outbreak of the epidemic in 2020, people's living costs will remain high for a long time. Janet Yellen, the secretary of the treasury, commented that the oil cartel's decision will hurt the global economy and especially developing countries.

While investing in small and mid-sized IPOs in emerging markets can serve as a potential safe haven, with some companies outperforming the broader market, it is important to note that stocks are inherently risky assets. In today's environment of soaring bond yields and the dollar, most investors prefer safe-haven. An overall YTD return of less than -80% for the U.S. IPO market in 2022 also speaks for itself. Nevertheless, with the implementation of a sound audit and compliance system, the financial reporting and information disclosure procedures of both newly listed and existing public Chinese companies will gradually become more standardized; therefore, their share prices will more realistically reflect the firms’ fundamentals, ultimately benefiting the interests of public investors.

Hywin Holdings to Acquire Beijing iLife3 Technology to Expand into Health Management Industry

SHANGHAI, China, Aug. 05, 2022 (GLOBE NEWSWIRE) -- Hywin Holdings Ltd. ("Hywin", or the "Company") (NASDAQ: HYW), a leading independent wealth management service provider in China, today announced that it has entered into a series of definitive share transfer agreements and capital increase agreement with Beijing iLife3 Technology Co. Ltd (“Life Infinity”), one of the leading integrated health management service providers in China, and its existing shareholders with an aggregate amount of over RMB140 million to acquire a controlling equity interest in Life Infinity, to expand into the rapidly growing health management market in China.

The Company expects the transaction to be completed by the end of August 2022, subject to customary closing conditions. Following the completion of the transaction, Life Infinity will be accounted for as a consolidated subsidiary of the Company.

Over the last decade, China’s healthcare sector has been growing at a double-digit pace to become a multi-trillion-dollar market. With rising affluence and an aging society, health management has become a priority for the families of Hywin clients in China, and a pressing topic for their wealth management advisors. Hywin, as a leading wealth manager with a high-net-worth client base across Greater China, has been acutely aware of client needs in the health management space and the significant value that can be created in their fulfillment. After a multi-year research effort on the health management sector, Hywin has accumulated strong expertise in this space, evidenced by the prominence of health topics in daily conversations with our clients, as well as the recent launch of the FactSet Hywin Global Health Care Index, which was inspired by Hywin’s insights on the health management sector.

“This transaction is the natural culmination of Hywin’s intellectual efforts in the health management space, and very much in response to client needs,” said Madame Wang Dian, Chief Executive Officer of Hywin. "We are thrilled to take this exciting next step with Life Infinity, and to deliver its well-established health management offerings to high-net-worth clients in Greater China. This acquisition represents another milestone in our strategic plans to unlock growing value from our enormous client franchise. This also makes Hywin the first independent wealth manager in China to integrate wealth and health into one holistic proposition, with cross-selling opportunities and cost synergies that naturally occur along with the wealth-health continuum.”

Mr. Lawrence Lok, Chief Financial Officer of Hywin, added: “Hywin’s over 1,600 relationship managers and 178 service centers across 88 cities in Greater China provide a strong infrastructure for introducing health management ideas to our clients as well as presenting health management solutions to them. The health management business will expand Hywin’s sources of revenues and further strengthen our client relationships. The complementarity of wealth and health will ensure our shareholders capture value from the two most important and systemic needs of China’s affluent population. Such an evergreen franchise will produce evergreen shareholder returns.”

Chen Li, Founder and Chairman of Life Infinity, commented: "Over the past 10 years, Life Infinity has dedicated to enhancing people’s quality of life through regenerative and preventive medical care, and premium health management. Health and wealth are intrinsically similar – crucial, complex, and private. Both services are built on long-term trust and can provide lasting value, and require the service providers to uphold fiduciary duties and professional devotion. This collaboration is a natural convergence, and marks a new era for the two companies. We see immediate as well as long-term synergies across branding, client service, solution delivery and cost efficiency. It is expected to enable both parties to provide more services and products to more clients, ultimately speeding up our growth and achieving more returns. We look forward to working closely with our Hywin colleagues in this transformative journey."

About Hywin Holdings Ltd.
Hywin (NASDAQ: HYW) is a leading independent wealth management service provider in China focused on providing asset allocation advisory services and comprehensive financial products to high-net-worth clients. The Company’s primary services are wealth management, asset management, and other comprehensive financial services. Wealth management is currently the Company’s largest business segment, in which its onshore and offshore solution platforms serve clients across generations. For more information, please visit

About Beijing iLife3 Technology Co. Ltd

“Beijing iLife3 Technology Co. Ltd” is a leading provider of integrated medical services and health management solutions for affluent and high-net-worth clients in China. The company’s flagship brand, Life Infinity, has been one of the market leaders specializing in health management, anti-aging solutions, and aesthetic medicine. Life Infinity’s mission is to curate and deliver world-class health technologies, expertise and products in China. Life Infinity operates clinics across Beijing, Shanghai, Chongqing and other key cities in China, as well as digital medical platforms and the “Life Infinity Plus” marketplace for health management products. Life Infinity is highly regarded in the industry, and holds the vice chair of the China Anti-Aging Promotion Association. Life Infinity is the exclusive health management provider recommended by The China Entrepreneur Magazine, and has won the “Best Anti-Aging Medical Services Institution” by The Family Enterprise Magazine as well as the “Best Performance Award for Anti-Aging and Cancer Screening & Prevention Solutions” by The Hurun Report.

Safe Harbor Statement
This press release contains statements that may constitute “forward-looking” statements pursuant to the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “anticipate,” “estimate,” “forecast,” “plan,” “project,” “potential,” “continue,” “ongoing,” “expect,” “aim,” “believe,” “intend,” “may,” “should,” “will,” “is/are likely to,” “could” and similar statements. Statements that are not historical facts, including statements about the Company's beliefs, plans, and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. Further information regarding these and other risks is included in the Company's filings with the SEC. All information provided in this press release is as of the date of this press release, and the Company does not undertake any obligation to update any forward-looking statement, except as required under applicable law.


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