Price for back-door entry into HKEx rises

Cost of short cut to trading on HK exchange now as much as HK$180 million, still seen as cheap for mainland firms amid IPO suspension

PUBLISHED : Saturday, 21 September, 2013, 12:00am
UPDATED : Saturday, 21 September, 2013, 2:29am

Mainland firms seeking a back-door listing as a short cut to trading in Hong Kong's internationally renowned stock exchange have to pay up to HK$180 million, almost six times that of 2006.

The suspension of initial public offerings by mainland authorities means more companies from across the border are expected to seek back-door listings here, which are seen as a cheaper alternative to the formal listing process.

That is good news for shareholders and creditors of troubled companies undergoing provisional liquidation, according to veteran liquidator Derek Lai, the Asia-Pacific leader of restructuring services at Deloitte Touche Tohmatsu.

[A back-door listing deal] is a win-win situation for everyone

Hong Kong Exchanges and Clearing statistics show there are 11 suspended companies undergoing restructuring that have applied to resume trading. Since 2006, such relistings have included Fu Ji Food and Catering Services, Ocean Grand Chemicals, 3D Gold and Mansion House.

"A listing status in Hong Kong is one of the most valuable assets of many listed debt-ridden companies put under provisional liquidation. The higher the price paid by the white knight for their back-door listing, the more money the shareholders and creditors can get," Lai said.

In the case of Fu Ji Food and Catering Services, creditors received 20 per cent of what they were owed, with remaining debts translated into a 7 per cent share of the company.

In the case of Ocean Grand Chemicals' restructuring in 2008, creditors received 50 per cent of debt back in cash and shares.

In a back-door listing, investors buy the majority shareholdings of the target company and inject their own businesses into the listed unit. The original business and assets of the company are sold later.

Normally, companies need to have three consecutive years of profits totalling HK$50 million before listing while mainland firms need lengthy approval, which may take several years.

Back-door listings may take only a year to complete.

"If a company applies for a new listing, it would need to pay all the fees to the investment banks, accountants and lawyers for the preparation work, even if the application eventually fails," Lai said.

Between 2005 and 2006, the value for these listings were only about HK$30 million because the exchange seldom approved any back-door listing.

The exchange had accepted more in the past few years, Lai said.

The exchange in recent years has been more willing to accept back-door listing deals for firms restructuring debt. Lai recently completed the restructuring of Fu Ji Food and Catering Services, which was a supplier to the 2008 Beijing Olympics. The firm was rescued by another mainland firm and resumed trading in July.

A source at the HKEx said the exchange had not changed its back-door listing policy but had always insisted on the quality of assets injected into the company.

In the past few years, white knights had included bigger state-owned companies, with strong business and assets injected into the back-door listing, making it easier to gain the exchange's approval, the source said.

"If the troubled firm can complete its debt restructuring and resume trading, the creditors and shareholders can get at least some of their money back from the back-door listing deal. The buyer secure a listing status. It is a win-win situation for everyone, and a happy ending," Lai said.

Fu Ji Food and Catering Services' shares dropped 60 per cent when they resumed trading, compared to what they were priced at before their suspension in July 2009.