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Friday, July 29, 2016, 11:00

Mainland firms' rush back set to drain HK's capital markets

By Luo Weiteng

The tide of Hong Kong-listed mainland enterprises heading back home to take advantage of the widening valuation gap may not lead to a broader return of cross-border listings in the SAR, according to stock market analysts.

But, they warned that the delisting of some high-quality mainland companies from Hong Kong would take its toll on cross-border investors and that the city’s capital markets will suffer.

At least 10 mainland firms listed in Hong Kong have unveiled privatization offers since the end of last year, tempted by the higher valuations that are often inflated by retail investors in the mainland markets.

Mainland firms' rush back set to drain HK's capital markets

More likely in the queue

Classic examples include Dalian Wanda Commercial Properties — the property arm of the mainland’s property-and-entertainment conglomerate Dalian Wanda Group owned by China’s richest man Wang Jianlin; and Evergrande Real Estate Group — the country’s second-largest property developer by sales.

“As long as the valuation gap between the mainland and Hong Kong markets is there, we’ll see more names heading back home for valuation arbitrage,” said Gao Ting, chief China strategist at UBS.

Although the Hang Seng China AH Premium index, which tracks the price gap between shares listed on the mainland and in Hong Kong, has dropped to its lowest level since October last year, it still shows mainland listings trading at an average 29 percent premium to the same company listed in Hong Kong.

Dalian Wanda Commercial Properties’ US$4.4-billion privatization offer, announced in March this year, came just 15 months after the shopping-mall developer made the biggest market debut of the year in Hong Kong in late 2014. The US$3.7-billion mega deal pushed the Hong Kong Stock Exchange up to the second spot worldwide as a fund-raising capital in 2015, second only to New York’s.

The mainland property giant, apparently, has been beset by lower valuations and lukewarm trading amid lackluster investor appetite in the SAR, with the company’s shares long trading below the initial public offering (IPO) price of HK$48.

Lower valuations, largely due to foreign investors’ distrust of such companies’ financial health and corporate governance, make it rather difficult for them to raise funds in the secondary market, and this hurts property and consumer companies in dire need of money to expand or transform their business, said Lu Wenjie, a Shanghai-based equity strategist at UBS.

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