Belt and Road set to rekindle interest in Hong Kong’s red chips

PUBLISHED : Friday, 12 August, 2016, 8:16pm
UPDATED : Friday, 12 August, 2016, 10:50pm

China’s flagship One Belt, One Road economic strategy is likely to reboot Hong Kong’s red chips, which have the structure and finances to help the mainland in its bold infrastructure plans right across the region.

The country’s Going Out initiative is also likely to raise the global profile of the listed companies, as they continue their drive for more overseas acquisitions.

Red chips refers to a company which is incorporated in Hong Kong but has a mainland parent.

They are different from H-share companies, which are firms with shares issued by mainland companies, but listed Hong Kong.

To investors, there may not be a lot different, but to bankers and executives the great advantage red chips have is being in a better position to help their mainland parents expand out of China.

Cosco Shipping Ports, one of the two largest port operators in China known until recently as Cosco Pacific, is a prime example of the type of firm sure to reap the benefits.

The Hong Kong incorporated red chip is owned by mainland shipping giant China Cosco Shipping Group, the world’s largest shipping company.

“Red chip companies reflect the beauty of Hong Kong as a fund-raising centre for mainland China,” said Kelvin Wong Tin-yau, Cosco Shipping Port’s executive director and deputy managing director.

“Since we are a Hong Kong company, we do not need to follow the regulations of the China Securities Regulatory Commission (CSRC). This allows us to have greater flexibility to issue shares to raise funds to acquire overseas assets.”

Mainland listed companies which have issued new A-shares in Shanghai or Shenzhen stock markets first need approval from the CSRC if they plan to issue H-shares in Hong Kong.

If they use their red chips to raise funds, however, there is no need to fall under CRSC restrictions.

Unlike Western or Hong Kong markets where companies can decide when to go public or issue new shares after listing, the CSRC controls the pace of new listings and any new share offerings.

It even suspends new listings or delays the approval of new issues from time to time when markets are volatile.

Wong said this is why mainland companies that need to raise funding to acquire overseas assets, often either issue H-shares or use their Hong Kong-based red chip subsidiaries to raise funds in the city.

Both red chips and H-shares can gain shareholder approval for general mandates and can issue up to 20 per cent stakes in the company.

“Given Beijing’s policy of encouraging mainland firms to ‘go out’ of China to acquire overseas business for expansion, the red chips offer a great advantage to act on behalf of their mainland parents. They can easily issue new shares to finance deals,” he said.

“This is particularly important for the Belt and Road project, in which mainland companies such as our parent are likely invest heavily in many infrastructure projects worldwide over the next few years.

“We expect there would be a lot of mergers and acquisition conducted via the red chips in Hong Kong,’ he said.

The Belt and Road is expected to see investment of US$800 billion a year, or US$8 trillion up to 2020. The ambitious projects planned will include building roads, railways and ports to establish linkages between 60 countries from Asian to Europe to promote trade and other business transactions.

Cosco Shipping Ports, first listed in Hong Kong in 1994, is a Hong Kong company set up to help its mainland parent conduct bank financing.

It later bought a number of ports from its parent, including in Shanghai, Zhangjiagang, Yantian and Qingdao. Wong said his company then purchased ports in Greece in 2009, and one in Turkey last year.

“We expect to acquire more overseas ports in light of the Belt and Road scheme,” he said.

Veteran investment banker Francis Leung Pak-to, often dubbed the “father of red chips” and the chairman of the Chamber of Hong Kong Listed Companies, also believes in their strong future role.

Leung hit the headlines throughout the 1990s when he arranged the listing in Hong Kong of many red chips, included industry leaders Citic, CNOOC, China Resources and China Everbright.

The initial public offerings of Beijing Enterprise and China Mobile also proved popular with investors, who competed hard for shares in the businesses.

“If companies list as H-shares, their listing schedule and all post-listing fundraising needs the approval of the CSRC.

“For those who list as red chips, they can be more flexible, in that they do not need such approvals and can raise money any time as well as having more freedom to use their funding,” Leung said.

For those who list as red chips, they can be more flexible, in that they do not need [CSRC]approvals and can raise money any time as well as having more freedom to use their funding
Veteran investment banker Francis Leung Pak-to

As a result, the red chips became the darlings of the market in the mid-1990s, with many investors betting big on the expectation that their mainland parents would continue to inject further capital into their Hong Kong arms.

The prices of many red chips collapsed with the Asian financial crisis in 1998, significantly reducing investor appetite in them.

But the most recent exchange data, however, shows strong renewed interest in the reds.

By the end of July, there were 152 red chips listed in Hong Kong, up from 144 a year earlier, indicating companies are again starting to favour the format.

Those 152 had a combined market capitalisation of HK$5.058 trillion, representing 21.26 per cent of the entire market, higher than the total value 233 H-shares, which come in with a combined market cap of HK$4.898 trillion, representing 20.59 per cent.

Red chips raised more funds than H-shares in 2014, but lost out to the latter last year and in the first seven months this year.

Ken Wong, a portfolio specialist at Eastspring Investment, said the Red Chip Index has not outperformed the H-Shares index for quite some time.

“Red chip companies exist to reduce tax payments given their foreign incorporation. This is really the main benefit we see red chips having over H-shares,” Wong said.

“In terms of corporate governance, we can’t see any big difference between red chips or H-shares as they have similar strengths and weaknesses.

“We also don’t see any reason why red chips have an advantage when it comes to hiring the best talent or being used as a vehicle for overseas investments,” Wong said.

UBS H-share strategist Wenjie Lu also says there’s no evidence red chips have an edge on fund raising or staffing levels.

“On the contrary, for companies that are seeking dual listings in the A-share market, the red-chip structure results in more complication than H-shares on fund raising.”