Should Hong Kong’s rules be loosened to attract more IPOs?
Recent evidence – Zhong An Online oversubscribed 391 times, China Literature breaking a 10-year record for first day trading, and gaming device maker Razer 290 times oversubscribed – suggests not
We are indeed in unusual times when the headline, “UK offers US$2B credit line to Saudi” pops up. How times have changed!
But this isn’t (yet) a bailout for an indebted nation. This is a British government loan guarantee for Saudi Aramco, the Saudi Arabian state-owned oil company, to encourage it to list in London rather than New York.
The Hong Kong stock market was always an outsider in the race to capture what could be the world’s largest listed company by market cap and our laissez faire economic policy would never allow such an inducement.
But the authorities have been agonising over capturing listings ever since Alibaba Group Holding turned its favours over to the New York board rather than us. That was something of a kick in the teeth as Hong Kong had always been the go-to place for large Chinese listings.
The reason, of course, was that New York regulations were in fact softer than those in Hong Kong. We still hold onto the original truth that one share equals one vote. That if you are to invest in a company, you should be compensated, not just by the share price going up, but also by a vote on the management should they be incompetent or criminal.
Entrepreneurs and managers do not like that (of course) and in many markets have come up with dual or limited rights shares so that issuers could have their very nicely frosted cake – and eat it.
Our listing rules – quite rightly – also require a company to show some inherent strength, like profitability, so that investors are not putting their money into a dubious shell that may disappear overnight.
Of course, the Growth Enterprise Market (GEM) was supposed to overcome these challenges by allowing small, unprofitable companies access to capital and a stepping stone to the main bourse.
The GEM has been perceived not to be a success, as sufficient companies have not showed (unlike in other counties) an ability to grow by listing on it, and a third market has been mooted as a means of overcoming this perception – but would that not suffer the same indignity?
The debate resurfaced over the summer, as Hong Kong was found to stand eighth out of nine main markets with a tiny percentage of tech listings.
The Nasdaq has 60 per cent tech, the US 26 per cent overall, and the Japanese market 13 per cent. As tech companies have been the beat-all performing sector, insiders have cried foul.
Some may say tech companies should indeed list in markets with a natural affinity, such as London’s history with mining companies.
Let’s face it: seven million people are hardly likely to be the tech initiators of the world.
On the other hand, we are quite good at the business of capital raising. So should we change the rules?
Recent events have undermined these arguments.
Meitu, a social software company, listed a year ago and the price sits at a happy 60 per cent premium. More recently we saw ZhongAn Online P&C Insurance, the insurance company, oversubscribed 391 times in September. China Literature, the Chinese version of Amazon’s Kindle Books, Chinese internet giant Tencent's e-book arm, broke a 10-year record for first-day trading two weeks ago.
The deal locked in some HK$520 billion of capital – 21 per cent of Hong Kong’s gross domestic product. It’s already equivalent in market capitalisation to the ninth largest company on the Hang Seng Index.
Nice business for Tencent, which has a stake in nearly all of these listings and has essentially sold shareholders its own assets twice.
Gaming device maker Razer, based in San Francisco with a Singaporean founder, was 290 times oversubscribed, raised HK$4.1 billion and jumped 18 per cent on its debut on Monday.
Meanwhile, Yixin Group, an online car retailing platform and another in the queues of soon to be listed tech companies, starts trading on Thursday
So have those doomsayers who argued for rule changes been proved wrong by events – or do we have more deep-seated problems yet to be exposed? Should we still lower our standards to that of other major markets by allowing dual-share classes?
This will be discussed in full on November 21 at the next SCMP Redesigning Hong Kong Debate Series at the Marriott Hotel that I shall be moderating. Come and hear our highly connected panel of Julia Charlton (lawyer), David Lau (banker), Albert Ng (wired-in consultant), capped off with Gary Ngan from Meitu itself. The conclusions might surprise …
The listed market scene is changing. It shows that China’s new economy is shifting to the tech and consumer sectors. Maybe the stock exchange and the Securities and Futures Commission of Hong Kong were right – all we needed was a little patience …
Richard Harris is a veteran investment manager, banker, writer and broadcaster – and financial expert witness.