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Thursday, September 22, 2016, 22:52

Hong Kong bourse on its toes as the ‘lion’ roars

By Oswald Chan
Hong Kong bourse on its toes as the ‘lion’ roars
Despite stiff competition from rivals like the Singapore and Chinese mainland bourses, the Hong Kong Stock Exchange is still believed to be relatively balanced in terms of market liquidity, valuation and pre- and post-listing fundraising capability. The local bourse operator is also mulling lowering its threshold to attract more technology company listings amid talk of introducing a dual-class shareholding system. (Edmond Tang / China Daily)

With arch rival Singapore breathing down its neck, Hong Kong has been urged to brush up its competitiveness as a listing platform in response to the Lion City’s approving a dual-class shareholding (DCS) structure in a bid to snatch initial public offering (IPO) business from the SAR.

Last month, Singapore Exchange Ltd (SGX) gave the nod to the new structure, favored by many technological startups as it enables company founders to control companies through holding smaller stakes.

It may be a necessary measure for Singapore’s bourse to attract more listings by technology firms as the city state had attracted few IPOs in recent years — having recorded a 17-year low of about $430 million worth of deals in 2015 — according to Thomson Reuters data.

The DCS structure is characterized by two classes of shares, where one class of shares with one vote per share would be subordinated to a superior class of shares, and which entitles the holder to multiple votes per share. This means some shareholders would be given voting power or related rights disproportionate to their shareholdings.

In Hong Kong, the only corporate shareholding structure currently permitted for listing candidates is “one share, one vote”, or equal voting rights for all shareholders — a system that has been in place since 1989.

“Hong Kong Exchanges and Clearing Ltd (HKEx) is considering establishing a new listing board with lower listing criteria to lure more technology companies to list on the city’s bourse,” HKEx Chief Executive Charles Li Xiaojia said earlier this month when commenting on SGX’s move.

Hong Kong brokers and accountants are supporting HKEx in exploring a new listing board or reviewing the current Growth Enterprise Market to attract more technology listings. However, many are not in favor of a DCS, saying it’s unfair to majority shareholders.

In a DCS structure, the potential risk of corporate abuse is imminent as minority controlling shareholders with special voting rights could entrench their control of the company. This will make the company more susceptible to corporate misconduct, casting doubt on corporate accountability and investor protection.

Chinese mainland e-commerce juggernaut Alibaba Group chose the United States for its $25-billion IPO in September 2014 rather than Hong Kong, as the city does not permit a DCS structure. Following Alibaba’s announcement months before the IPO, HKEx began a series of consultations from August 2014 on whether to adopt the DCS format.

However, the city’s bourse operator finally gave up the plan after it was shot down by the Securities and Futures Commission in June last year, saying it cannot resolve the issue of shareholder protection.

Hong Kong bourse on its toes as the ‘lion’ roars
An analyst reads a brochure of Hong Kong Exchanges and Clearing Ltd during the company’s earnings news conference in 2015. Jerome Favre / Bloomberg
With a slew of technology company IPOs planned in the coming quarters, HKEx desperately needs to flex its competitiveness as an IPO fundraising platform, in addition to reviewing the corporate listing structure.

Xiamen-based photo retouch app developer Meitu Inc, backed by Qiming Venture Partners and IDG Capital Partners, plans to raise between $500 million and $1 billion in Hong Kong in the fourth quarter of this year, according to market sources.

Alibaba Group Holding’s finance affiliate Zhejiang Ant Small & Micro Financial Services Group (Ant Financial) is also mulling an IPO in Hong Kong in the first quarter of next year, market sources said.

Ant Financial controls the mainland’s biggest online payment service provider Alipay and is currently valued at $60 billion. It will be one of the largest ever IPOs for Hong Kong if Ant Financial opts for the city’s bourse.

Despite the challenges, analysts still believe Hong Kong will retain its status as the world’s leading IPO venue in terms of proceeds raised.

“The Hong Kong IPO market is expected to remain as the exchange of choice for mainland companies seeking access to public equity financing; and the number seeking to do so will likely increase as the trend toward deleveraging among mainland companies gathers pace,” said Maggie Lee, a partner at KPMG China, adding the city can raise up to HK$200 billion this year alone.

“Hong Kong still possesses strong advantages for mainland companies that have a funding urge for development and need to go global,” said Edward Au, co-leader of the national public offering group at Deloitte China. The accountancy firm predicts that Hong Kong will have about 115 IPOs in 2016, raising some HK$200 billion.

“The Hong Kong market is still relatively balanced in terms of market liquidity, valuation and pre- and post-listing fundraising capability. Local small and medium-sized enterprises (SMEs) are still eager to get listed in the Hong Kong SAR, which is evident in the surge in listing applications. It continues to be one of the hot listing venues for SMEs in Southeast Asia, especially for those run by overseas Chinese or with a China business strategy,” Au said.

But analysts also warned that the Hong Kong IPO market must remain vigilant and resilient enough to withstand competition from mainland bourses.

“An acceleration of IPO debuts (on the mainland bourse) is expected once the existing macroeconomic and political uncertainty is lifted. Many of these IPOs will continue to come from manufacturing and technology companies and will be small and medium in scale,” said Au.

“In the long term, we still expect more high-profile technology, media and telecommunications companies to look to A share listings. In addition, with the development of multi-level capital markets, including the new board for strategic emerging industries, there will be a profoundly positive impact on the (mainland) domestic markets,” PricewaterhouseCoopers Hong Kong assurance partner Benson Wong said.
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