Dual share class is a sore thumb in Hong Kong’s new tech board
Hong Kong’s proposed new board to draw tech and new economy firms and start-ups to list has received mixed views.
The Hong Kong Exchanges and Clearing’s proposed third board to draw technology and new economy firms to list in the city has received a general welcome from market players, but it is too soon to tell how big a draw it will become.
The new board announced by the exchange in a consultation paper on Friday limits listings to technology and new economy companies, and is intended to plug the gap that the bourse’s main board and the Growth Enterprise Market have not been able to fill.
The board will consist of two markets.
The premium market will target large companies that match requirements for the main board but have a dual shareholding structure. US-listed firms with dual share structures can apply for a secondary listing, and retail investors will be allowed to trade in this market.
The second market is designed to help start-ups raise funds. It will have a low entry threshold and light regulatory touch. To segregate the good and poor quality companies, a delisting mechanism will be in place. Firms will be delisted if they failed to meet certain operation requirement, if their share prices fell to a certain threshold, or if they had been suspended from trading for 90 days. This market will only be opened to institutional investors.
Charles Li Xiaojia, chief executive of HKEX said that overseas-listed Chinese companies with dual class structure currently banned from listing in Hong Kong, could now opt for a secondary listing.
“For the longer term, there is no reason why Hong Kong could not attract some big US technology and new economy companies to consider a secondary listing,” he said.
But he acknowledged that it will be an uphill task as the US is already the largest technology market.
While the new board will adopt an “easy in, easy out” approach, Li stressed that “the new board will not become a farm of shell companies”.
The new board’s limitation to tech firms and start-ups aim to achieve what the Growth Enterprise Market was originally intended for when it launched in 1999, targeting the very same types of firms. Eventually, only 18 per cent of GEM firms have links to information technology, while 29 per cent operate in the consumer and services sector and 26 per cent are construction companies.
Hong Kong was the top IPO market worldwide last year but only 3 per cent of funds raised were for technology companies. Five technology firms listed in Hong Kong last year, raising HK$5.7 billion (US$730 million), while the nine GEM technology companies raised only HK$800 million, far below Nasdaq’s HK$15.9 billion, New York’s HK$8.7 billion and Shenzhen ChiNext’s HK$7.9 billion, according to PwC.
Here’s what different market players say about the third board.
Start-ups welcome the board but are uncertain if they would list in Hong Kong.
Ping An Insurance’s internet lending and wealth management provider, Lufax is planning a listing, but is undecided on which market to IPO.
“We are open-minded about the listing of Lufax. There is no concrete timetable and listing venue about the listing yet,” said a spokeswoman of Ping An.
Alex Lee, a former banker who co-founded online education platform Mast Education with his mother and partners in late 2015, said he relied on his personal savings for start-up funding. While he welcomed the idea of the third board as a new fund-raising channel, his company may not opt for an offering soon.
“Overall, it would be a good move for Hong Kong to have a new third board with the purpose to help start-ups and other new economy companies to raise funds. This would hopefully encourage more Hong Kong young people to set up their own businesses,” he said.
Mast, which aims to provide high school students with university-level courses to boost their learning and be prepared for examinations, has been in operation for nearly two years. It has attracted more than 1,000 users globally, with a large proportion of them from the US, Hong Kong and China.
Lee said he would wait out till his business was bigger before considering a listing on the third board or elsewhere.
Rod Drury, chief executive and founder of Xero in New Zealand, said unlike Xero which floated in its first year, it was rare for a start-up to go public within a year of being founded. The firm uses cloud technology to help small and medium-sized enterprises better manage their accounting.
“We did everything backwards. Listed first, then brought in funding from hedge funds and venture funds including Accel, Matrix and TVC,” he said.
He recalled that there were few options in New Zealand to secure private capital for a technology start-up when the company was set up in 2006. He and other co-founders funded the firm out of their own pockets, and then listed on the New Zealand Stock Exchange (NZX) in the first year, followed by the Australian Stock Exchange (ASX) in 2012.
“As a technology start-up that went public within our first year, we encourage exchanges and others who offer capital raising options to consider how best they can support high growth businesses like ours with options for capital to support growth,” he said.
Drury is supportive of the idea of a third board as Xero’s own listing has helped the company expand.
Thomas Yue, who founded JabJabX, an app that stores and analyses data to help users hone their technique in Chinese martial arts, said he and his co-founders tapped on their personal savings of about HK$400,000 to set up the company earlier this year.
He would wait for the details of the third board before deciding if it would seek a listing.
“We do not need to rush to go public because we could find some angel investors or funds who share our mission to become our investors. We would like investors who can provide guidance to us to develop our business and to allow us to access to their network of contacts,” Yue said.
“Listing on the stock exchange would help us to raise funds but it could not help us to expand our network. At present, the cost of bank interest rate remains low, so it is not hard to find low cost of funding,” Yue said.
BROKERS AND FUND MANAGERS
Brokers said Alipay – the payment arm of a unit of the Alibaba Group – and Lufax, an internet finance arm of Ping An Insurance, which are considering listings could be potential candidates for the third board’s premium market.
The stock exchange had two years ago tabled the proposal to allow dual-class shareholding companies to list in Hong Kong, but was quickly rejected by the Securities and Futures Commission (SFC). This time around, the SFC chairman Carlson Tong Ka-shing said they had agreed to the consultation as the listings would be limited to the new board, compared with the previous proposal that applied to the entire market.
The Hong Kong Investments Funds Association, the industry body of fund houses in Hong Kong, is opposed to such a structure.
“In principle, investment managers believe that “one share one vote” is a cornerstone of investor protection,” said Sally Wong, chief executive of HKIFA.
“As for the discussion about the proposed third board, we should not view this in silos, but take a holistic approach and consider the relationships between the different boards. For example, will a third board listed company be “upgraded” to the main board? Or from the start-ups to the “premium” class? If yes, what are the exit or entry mechanisms,” she said.
Brett McGonegal, chief executive of Capital Link International said the attempt to draw sought-after technology companies to list in Hong Kong had two audiences to placate including the companies and public investor.
But the balance between the two was not easy to strike, he said.
“Voting control through a dual class listing system does not translate into risk nor impropriety. However, the exchange needs to make sure the individual investor’s interests are both aligned and protected. The old expression buyer beware cannot be the basis of a regulatory protection campaign because nothing is more paramount in the list of priorities,” McGonegal said.
Mark Mobius, executive chairman for Templeton Emerging Markets Group, who manages US$26 billion for clients in emerging markets including Hong Kong and mainland China, said he fully supported the HKEX consultation.
“A third listing board will give an opportunity for fintech and innovative companies to compete in Hong Kong and share in the success of Shenzhen’s ChiNext which has been successful in raising capital for this rapid growing sector of our industry,” Mobius said.
“We believe dual class shares if structured appropriately, that is where all the rights to the shareholders are commonly shared, will be beneficial to the market as it should allow enterprising companies listed overseas to dually list in Hong Kong.”
Defining technology firms and the corporate governance that entails would be the issues to address, analysts said.
“The third board concept would be a good idea to attract more technology companies to list but how to define a firm as a technology or new economy firm may be controversial. If a company is conducting online lending services, is it considered as a traditional financial firm or a new technology company?” said Joseph Tong Tang, chairman of Morton Securities.
Keith Pogson, a senior partner of EY, said Hong Kong needed to diversify its IPO portfolio.
“There are many challenges to the Hong Kong market,” Pogson said. “We need to be responsive to the changing financing needs of the market. However this needs to be done in an investor friendly and robust way, as at the bedrock of Hong Kong’s success is the quality of process and governance that Hong Kong can bring,” Pogson said.
“We need to ensure that are market is ready for changing business models, that we understand markets such as technology, fintech, infrastructure and other evolving financing needs.”
Mark Konyn, group chief investment officer of AIA Group, said international exchanges were competing to attract new listings as the capital markets and the finance industry integrate globally.
“Creating new boards to attract companies under reduced levels of governance and less onerous listing requirements is a hot topic and one that needs to balance the commercial opportunity for the bourse itself and access opportunities for local investors with investor protection and oversight,” Konyn said.
“Technology driven businesses have access to many funding sources and international stock exchanges are keen not miss out on what is widely expected to continue to be a dominant sector for growing market capitalisation.”