Why do Hong Kong’s international listings always fail to take off?
In the last week, swiss mining giant Glencore and US fashion chain Coach have said they are cancelling their secondary listings in the city
The exits of Swiss mining giant Glencore and US luxury fashion retailer Coach from their secondary listings in Hong Kong shows it was never easy for international firms to take off.
Glencore on Tuesday said it would delist from Hong Kong in January while Coach, which changed its name to Tapestry on Tuesday, said a day later that it too would apply to delist from Hong Kong, but without providing a timeline.
They both cited thin turnover as the main factor in their decision. According to brokers, the Brazilian mining firm Vale cancelled its secondary listing in Hong Kong last year for the same reason.
“Secondary listings are challenging because capital is not raised in the market. This has proven to be the case internationally,” said Mark Konyn, group chief investment officer of AIA Group.
Brett McGonegal, chairman and chief executive of Capital Link Investment, said Hong Kong should think about its cost issue if it wants to improve turnover.
Many markets no longer levy a stamp duty for trades, but the Hong Kong government still collects 0.1 per cent from the buyer and the same amount from the seller of the value of each stock transaction. It is the single most expensive item in stock transactions in Hong Kong, compared with brokers’ commission of about 0.05 per cent of the transaction value, a 0.0027 per cent levy paid to the Securities and Futures Commission, and a 0.005 per cent trading fee paid to the exchange.
Coach had wanted its listing in Hong Kong to raise its profile in mainland China, while Glencore had wished to increase its shareholder base with more investors from Asia.
Coach’s listing did not involve offering shares here, merely allowing investors to trade existing issued shares. Glencore had an IPO in both London and Hong Kong in 2011, but only offered 2.5 per cent of its IPO shares in Hong Kong.
Brokers said this was a major reason for the lack of trading.
Coach’s stock changed hands on 21 days in the past 12 months. In the first 10 months of 2017, just 31,000 of its shares were traded in Hong Kong, compared with 206 million in New York where the company has its primary listing.
Glencore had 28.2 million shares traded in Hong Kong in the first 10 months of this year, compared with 9.87 billion in its main market, London, during the same period.
Once Glencore and Coach have gone, Hong Kong will only have five secondary-listed companies, half its peak of 10 between 2011 to 2013 when the exchange was promoting itself to international companies which had already listed in other markets.
“These secondary listings do not have any IPO or roadshow. The IPO is a good chance for local investors to learn about these international companies. Without an IPO, there is lack of a shareholder base in Hong Kong, and hence trading after the secondary listing is thin,” said Gordon Tsui Luen-on, managing director of Hantec Pacific.
For international firms that want to see their stock trading more heavily, Tsui said they should opt for primary listing or share offerings to attract more liquidity.
This is underlined by the two most successful secondary listings in Hong Kong.
Manulife, the city’s second largest life insurer, is the longest-standing secondary listing company to date and the most actively traded one since its debut in 1999. That’s because it gave shares to its thousands of policyholders, which created a shareholder base here. The company also listed in Toronto and New York.
Canadian-listed coal producer SouthGobi Energy Resources had an IPO in Hong Kong in its secondary listing here in 2010, raising US$439 million, and had roadshow to market its shares. It is the only Hong Kong secondary-listed company to have higher turnover than in its primary market in Toronto.
SouthGobi saw trading of 105.36 million shares in Hong Kong in the first 10 months of the year, higher than the 559,154 shares that changed hands in Toronto.
Dated back further, the other HKEX effort to push internationalisation of the local market has not been so successful.
HKEX in 2000 launched a scheme to allow Hong Kong investors to trade the seven Nasdaq-listed companies. Apart from coffee chain Starbucks, the other six Nasdaq companies – Microsoft, Intel, Dell Computer, Cisco System, Applied Materials and Amgen – are from the high-technology sector.
That was the earliest attempt by the HKEX to boost international and technology trading in Hong Kong, but so far trading levels have been low, as investors prefer to trade in the US market. Dell later delisted from Hong Kong.
Among the remaining six, five saw no trading whatsoever in September, while 180 Intel shares changed hands during the month – a turnover of HK$50,400 (US$$6,459). For the first nine months, three of them saw no trading, while Cisco, Microsoft and Intel shares had a combined turnover of HK$100,150.
“These delistings should send a message to the exchange, and the message says that the cost to trade in the Hong Kong market doesn’t offset the liquidity it provides,” McGonegal said.
“The simple fact is HKEX is too expensive for the modern day liquidity providers to trade. So we see more volatility and thinner markets. This makes secondary listings unappetising to investors, especially institutions because there is no value proposition on top of no liquidity.”