SNP - Sinopec: Worst Fears Realized

• Sinopec is a global energy giant trading at discounted valuations.
• It recently announced plans to delist from the NYSE.
• Expect an avalanche of selling ahead of the delisting date.

A few weeks ago, I wrote an article detailing the reasons why I think China Petroleum & Chemical Corporation ( SNP ), commonly known as Sinopec, was trading so cheaply. In the article, I wrote:

One of the biggest overhangs on Chinese ADRs in recent years is the possible delisting of the shares due to The Holding Foreign Companies Accountable Act ("HFCAA").

The HFCAA was enacted in December 2020 and states that the SEC has the authority to prohibit shares or ADRs from trading if the company has been audited by an accounting firm that has not been subject to an inspection by the Public Company Accounting Oversight Board ("PCAOB") for three consecutive years beginning in 2021. Furthermore, in June 2021, the U.S. Senate passed an act to accelerate the HFCAA to 2 years instead of 3.

Sinopec was conclusively identified by the SEC as of May 26, 2022, and hence is subject to delisting with the above timelines. If the shares are delisted, investors in the NYSE-listed ADRs may not be able to sell their shares, or may have to convert their shares to the H-shares listed in Hong Kong.

Chinese State-owned Giants To Voluntarily Delist

Well, my worst fears were realized on Friday, August 12, when Sinopec, PetroChina ( PTR ), along with China Life ( LFC ) announced plans to voluntarily delist from the NYSE .

It appears that rather than co-operate with the PCAOB and other U.S. regulators to resolve the accounting dispute, China has chosen the nuclear option and begun severing economic ties via delisting some of their largest companies. No doubt the recent rise in geopolitical tensions between China and the U.S. played a hand in this decision. This now begins a ticking time-bomb for the more than 200 other Chinese companies listed on American exchanges that fall under the HFCAA. (Please follow this link for the full list of securities that may be affected.)

What Does Delisting Mean?

Reading through the press release from Sinopec, there are not many details on what happens to investors who hold the ADSs. We just know the company intends to delist its ADSs from the NYSE on August 29, 2022.

My best guess is that if the ADSs are delisted and de-registered, they will convert into the underlying H-Shares that trade on the Hong Kong Exchange. However, investors are highly encouraged to do their own due diligence on this matter. Also, investors should find out if their brokerage account can hold H-Shares.

In any event, I expect an avalanche of selling in the coming days ahead of August 29th as U.S. investors who own the ADSs try to get out.

Conclusion

In summary, this goes back to my original thesis on Sinopec. While the stock may screen very cheaply on metrics such as P/E and cash flows, there are important qualitative factors that investors must consider, especially when investing in State-Owned-Enterprises ("SOE").

For further details see: