‘Dual-class’ nod set to spark IPO spree in HK

HONG KONG (China Daily/ANN) - Bumper year seen for stock listings in Hong Kong amid a ‘new economy’ rally 

Hong Kong is eyeing a bumper IPO year for 2018 after the financial hub initiated the biggest change yet to listing rules on the city’s bourse, setting the stage for the entry of a long list of new-economy companies from the Chinese mainland. 

After two consecutive years holding the global IPO crown, Hong Kong last year lost its much-coveted honor of being the world’s top venue of choice for companies seeking debut listings in 2017 in the absence of blockbuster flotations.

In its quest for a new growth engine, Hong Kong Exchanges and Clearing — the city’s stock exchange operator — said in December last year it had begun drafting specific rule changes that would pave the way for the issuance of controversial dual-class shares after the Securities and Futures Commission backed off from its long-entrenched “one share, one vote” principle.

Dual-class shares, also known as weighted voting rights and allowed on many bourses around the world, including those of the United States, Canada, France and Switzerland, typically grant a particular group of shareholders greater voting rights than others and are favored by the so-called new-economy companies as a way of shielding founders and top executives from short-termism. 

The highly sought-after new-economy companies offered a major boost for Asia’s third-largest exchange by market capitalization last year — a bourse that has long been dominated by enterprises engaged in the traditional financial services and real-estate sectors — the twin pillars of the SAR’s economy.

Four new-economy companies made their way to Hong Kong’s 10 biggest IPOs in 2017, compared with none the previous year.

The share offering of China Literature — backed by mainland tech and titan Tencent Holdings Ltd and dubbed as the city’s hottest and most profitable flotation over a decade — coupled with the headline-grabbing listings of Zhongan Online P&C Insurance, Yixin Group Ltd and Razer, presented an IPO bonanza for Hong Kong investors and laid the path for other promising tech startups to follow suit.

“The adoption of dual-class shares fits in well with the city’s burgeoning appetite for new-economy companies,” said Edward Au, Hong Kong-based co-leader of the national public offering group at Deloitte. “By conservative estimates, a constellation of promising firms, including a handful of the so-called unicorns, will trigger an IPO spree in Hong Kong in the final quarter of 2018.”

Worldwide investors are betting big on as much as 200 unicorn startups, valued at above US$1 billion, making their market debut in the near future.

The mainland is currently home to some 100 fast-growing companies, most of which have long approached the public listing stage. They include such household names as Ant Financial, Didi Chuxing and Xiaomi, which have been named the top three unicorns in the world’s second-largest economy, according to the latest report from the Hurun Research Institute in December 2017.

Mainland smartphone maker Xiaomi, hailed as one of the oldest unicorns across the globe, and the world’s top three unlisted unicorns next only to Ant Financial and Uber, is reported to be in talks with investment banks about an IPO as soon as 2018, with Hong Kong standing as the most likely destination.

A flotation by Xiaomi, eyeing a valuation of at least US$50 billion, could turn out to be the largest-ever tech IPO outside the Silicon Valley.

Tencent Music Entertainment Group, controlled by the mainland’s biggest social network operator, is said to be aiming for one of the country’s most-anticipated IPOs this year. Either Hong Kong or New York could host the listing that’s expected to raise at least US$1 billion and valued at US$10 billion.

Other high-profile potential technology offerings in 2018 could come from Ping An Insurance Group-backed peer-to-peer online lender Lufax, which is considering a Hong Kong listing in the first half of 2018 to raise up to US$5 billion, and its Shanghai-based rival Dianrong.com, which closed a US$200-million funding round led by Singaporean sovereign fund GIC Private Ltd in August last year, and is seeking a listing as soon as this year to raise at least US$500 million.

Online healthcare platforms, including Tencent-backed We Doctor and Ping An-backed Good Doctor, are said to be among the key driving forces in this year’s tech IPO boom.

Maggie Lee, Hong Kong-based head of capital markets development group at KPMG, said 2017 marked “a year of transition”. 

“For years to come, new-economy companies will be the real game changer and trendsetter for the city’s IPO market,” she said.

Au, however, has reservations. “Such a momentum may not last that long as investors may expect. For new-economy unicorns, the sheer existence of dual-class shares is not the only key factor they take into account when choosing a listing destination. An equally important consideration, if not more important, is whether there’s an ecosystem available for new-economy companies to thrive and prosper.”

Known as a financial center having the best of both worlds, Hong Kong is naturally seen as the first choice of mainland tech enterprises seeking to go public.

Hong Kong is in the same time zone and tightly intertwined with  mainland markets, with an army of investors hungry for promising tech stocks and boasting deeper familiarity with mainland companies, compared with their peers in New York, which wrested the IPO crown from the SAR last year and is engaged in a fierce tussle with Hong Kong for new tech listings.

“The introduction of dual-class shares makes the territory’s listing rules more flexible, polishing Hong Kong’s brand as a more attractive IPO destination. But, this is the just the very first step,” said Dick Kay, Shanghai-based co-leader at Deloitte’s national public offering group.

“It’s just the building block of an ecosystem that will eventually reshape Hong Kong as a magnet for tech giants, whose much-awaited listings will put Hong Kong on course to secure a place among the top three in the global IPO league table in 2018.” 

“Looking ahead, it may take extra years of hard work to educate investors about the potential risks, establish a solid mechanism infrastructure and more stringent regulation requirements, and ultimately allay concerns that such a revamp of IPO rules will erode market integrity,” Kay reckoned.

“This will equip Hong Kong to retain its allure for more up-and-coming new-economy companies and help the city better compete with New York.”


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