Listing is the ultimate goal
AS CHINA'S INTEGRATION with the global economy gathers pace, a stock exchange listing has become the ultimate goal for many mainland enterprises. Securing this marks an important corporate milestone and provides a launch pad for further lucrative growth.
Mainland companies began to raise funds from stock markets in 1993 and Hong Kong has usually been the first port of call. Although exchanges in New York, London and Singapore are competing for this business, Hong Kong leads the way with 300-plus such listings, representing more than 40 per cent of total market capitalisation.
The fact that the Bank of China has decided to raise $54.6 billion from its upcoming initial public offering (IPO) in Hong Kong is further confirmation of the exchange's maturity and ability to attract international investors.
Gordon Lee, a partner with Deloitte Touche Tohmatsu, said Hong Kong's geographical and cultural proximity to the mainland was an obvious advantage. He said this enabled Hong Kong to offer global investors exposure to the fast-developing mainland economy in a business environment regulated by international standards.
'Preparing for a public listing, wherever a company chooses, always involves a tremendous amount of due diligence, auditing and accountancy work,' he said.
Mr Lee said it could take a year or more to help a mainland enterprise comply with all the regulatory requirements. This created challenges and opportunities for Hong Kong's accountancy and auditing professionals, who were qualified to steer clients through the complexities. For them and their mainland counterparts the priority was to ensure that companies met the highest international standards of corporate governance.
'It is clearly a strategic advantage for mainland companies to be in compliance with the very highest governance standards that accompany listing on the US, European or Hong Kong stock exchanges,' he said.
Qualifying for a United States IPO entails establishing a clear set of internal financial controls and reporting structures. This can be a complicated process, since it involves a complete review of the company's operations and, potentially, the entire workforce from top management to shop floor employees.
Mr Lee said the time required to do this from scratch could make preparing for a New York listing much more burdensome. The infrastructure must be in place and the system up and running for at least six months to eliminate problems before the IPO is launched.
The market capitalisation of the 16 mainland companies listed on the New York Stock Exchange (NYSE) ranges from US$1.2 billion to US$150 billion. They include CNOOC, Sinopec, Yangzhou Coal, China Mobile and China Southern Air.
By comparison, capitalisation of the 23 Chinese enterprises on the Nasdaq is between US$132 million and US$1.6 billion.
One of the most successful IPOs on the Nasdaq last year was Baidu.com, the mainland's version of Google.
Telecommunications, media and tech stocks are expected to seek US listings in future, and those involved in medical products, environmental energy and consumer goods may take the same route.
The well-regulated London stock exchange is also seen as a good market for IPOs. It expects to handle at least 20 mainland listings this year and, as Europe's biggest bourse, aims to attract the newer entrepreneurial Chinese firms looking to raise capital.
London also wants to attract privately owned mainland firms to its Alternative Investment Market (AIM), a second-tier board for smaller, fast-expanding companies.
Last year, 16 mainland firms joined the AIM and raised, on average, about #80 million ($1.1billion).
Mr Lee said US investors generally had a better perception of technology and high-growth stocks. This generally allowed companies to float shares at a higher valuation in New York, despite the higher US compliance costs. A basic Nasdaq listing costs US$150,000, while a NYSE debut costs US$250,000. However, preliminary compliance costs usually run into millions.
To safeguard Hong Kong's reputation as a leading financial centre, Hong Kong Exchanges and Clearing has responsibility for ensuring orderly and fair markets, and that risks are managed prudently. It also ensures consistent operating procedures to maintain the best interests of the investing public and to offer a transparent, well-regulated market for firms to list their shares. This means that investors can participate in the growth of both local and overseas companies, knowing that they are investing in a market that meets the best international standards.
