Will Hong Kong be the perfect alternative for tech firms seeking IPOs outside th...

Will Hong Kong be the perfect alternative for tech firms seeking IPOs outside the mainland?- PingWest

Will Hong Kong be the perfect alternative for tech firms seeking IPOs outside the mainland?

Rebbeca Ren

posted on July 30, 2021 1:56 pm

Hong Kong should be all-prepared for the potential upcoming IPO boom.

Multiple Chinese companies have revoked the plan of raising money in the US stock market and are considering switching to Hong Kong, as China has vowed to strengthen scrutiny of companies seeking overseas listing and quickly cracked down on the ride-hailing giant Didi after its debut in New York.

It's also a critical choice that Chinese companies, especially tech firms involving massive user data, have to make in the context of intensified competition between China and the US. 

The shift will undoubtedly benefit the Hong Kong stock market as it signals that a group of fast-growing companies will inject more vitality into it. Previously, Chinese tech firms going public have long preferred New York for its deeper, more liquid markets, higher valuations, and ease of listing compared with Hong Kong.

Now, it's urgent for the Hong Kong Exchanges and Clearing (HKEX), which has missed several big-name IPOs, to step up reforms and better serve companies seeking to go public.

The bourse operator underwent a major reform in 2018, which was described by the South China Morning Post as the largest involving listing rules in three decades. Companies with several classes of voting rights and biotech companies without revenue got the green light to be listed in Hong Kong. It also made it easier for US-listed tech firms to launch secondary listings in the city.

Xiaomi, the world's second-largest smartphone maker, was the first company with a dual shareholding structure to list in Hong Kong. It was impossible before the reform, as the Asian financial center had been banning companies with this structure from listing for years. Also, it's one of the reasons why it lost Alibaba, which originally sought IPO in Hong Kong. After the reform, the US-listed e-commerce giant returned to the city for a secondary listing in 2019.

This milestone reform has increased HKEX's attractiveness, making it a heavyweight option for tech companies seeking diversified financing beyond the US market. 

On-demand delivery giant Meituan and short video platform Kuaishou launched IPOs in Hong Kong in 2018 and 2021, respectively. During this period, batches of US-listed Chinese companies, including NetEase, Bilibili, Trip.com, and most recently XPeng, returned to Hong Kong for a second listing, fueling the stock market.

From the beginning of the reform in April 2018 to March this year, a total of 146 new economy companies have been listed in the city, raising a total of HKD 682.2 billion ($88 billion) in the process, data from HKEX stated.

Although the 2018 reform has delivered unneglectable accomplishments, going public in the US still counted as the most favorable choice for Chinese unicorns before the rollout of the latest proposal from China’s top internet regulator. 

According to Refinitiv, during the first six months of the year, 34 Chinese companies raised a total of $12.5 billion from listings on US exchanges. The amount of funding raised by the firms represented a 561% jump from the same period in 2020.

Chinese companies seeking to list in the US have also bothered Charles Li, chief executive of the HKEX, who hopes to attract more foreign capital for the mainland. "Although we have made reforms in the past few years...It is necessary to consider why Hong Kong has not become a good intermediary," the executive said.

Entering July, things started to be different, as Beijing said that it would strengthen the supervision of overseas listed companies. The Cyberspace Administration of China also considers requiring companies with more than 1 million users to conduct additional security reviews before listing overseas, which may last as long as three months or more. 

Meanwhile, the variable interest entity (VIE) structure, an arrangement adopted by many tech companies to list overseas and circumvent Beijing’s rules on foreign ownership of certain sectors, may also be restricted.

Before the details of the regulatory system are finalized, Chinese listing in New York will be severely curbed. "It could take months for companies looking to list abroad to gain approval. If they can’t wait, Hong Kong will be their only choice," said Bruce Pang, head of research at investment bank China Renaissance.

Global investment banks are racing to redirect Chinese groups’ initial public offerings towards Hong Kong after new cybersecurity rules, Financial Times reported. 

According to Bloomberg, China is considering exempting those companies that want to list in Hong Kong from the cybersecurity review process, which would make it far less tedious to list on the Hong Kong exchange than in the US. 

But strict listing rules in the financial hub, such as minimum profitability requirements, etc, meant that many companies would struggle to sell shares in the territory. Recently, the secondary listing application of Nio has been put on hold by the HKEX due to its user trust issues. In early 2019 William Li, founder, chairman, and CEO of the electric vehicle brand, took out his own 50 million NIO shares for the establishment of the Nio user trust.

Hong Kong should be all-prepared for the potential upcoming IPO boom. Currently, HKEX is working on speeding up IPOs, improving the system that investors must wait at least a week for a newly priced stock to start trading. 

Compared with the US market, where stocks typically begin changing hands a day after an IPO is priced, the process is relatively long, increasing the risk that market sentiment will deteriorate due to external events. The plan is due to take effect in the fourth quarter of 2022. Earlier, on April 29, HKEX said it will extend reforms introduced in 2018 to attract more listings by the new economy and international companies. 

But uncertainties can't be ignored. As China's influence on the city increases, the volatility of the Hong Kong stock market also follows that of A-shares. Last week, China launched the latest crackdowns on the Internet sector, involving the online education and tech giants such as Alibaba and Tencent, sending the mainland and Hong Kong stock markets into a plunge. 

Some foreign investors have lost confidence in investing in the market, considering that government policies always have excessive impacts on the industries. Cathie Wood's Ark Invest is rapidly shedding its positions in Hong Kong-listed Chinese tech stocks. In a webinar with investors earlier this month, the well-known investor said a "valuation reset" among Chinese stocks is occurring, and that their valuations could remain depressed for some time.