Hong Kong exchange could be beneficiary of trade war as mainland tech start-ups shun home and New York markets for IPOs
An increasing number of Chinese companies are seeking to raise capital in the technology, media and telecommunications sectors especially on the city’s stock market
Hong Kong is gaining traction as the primary choice for mainland technology firms seeking to float as they shun stock exchanges in New York, and mainland China, amid the two countries’ simmering trade war.
Frank Lin, a partner at PwC in Shanghai, said an increasing number of Chinese companies are seeking to raise capital in the technology, media and telecommunications (TMT) sectors on the city’s stock market, as they assess the ongoing and potential future impact of the trade stand-off.
“The US-China trade war is expected to escalate in the foreseeable future, and it is going to affect decision-making by Chinese TMT firms looking to choose listing venues,” he said, adding that mainland companies are also closely analysing the spat’s effect on their valuations.
The battle among regional and global stock exchanges to attract prospective Chinese technology firms escalated in the first half of this year when mainland regulators attempted to up their ante in easing IPOs by foreign-funded mainland companies through the Chinese depositary receipts (CDR) mechanism.
Announced in March and aimed especially at luring overseas-incorporated technology leaders, the CDR enables mainland investors that are barred from freely moving their money abroad, to directly trade-in the underlying securities issued overseas.
The pick up in IPO business in Hong Kong is significant, given the high stakes involved.
In 2017, Shanghai eclipsed Hong Kong for the first time in both the number of IPOs and the amount of capital raised.
But the recent lacklustre performance of the A-share market has deterred mainland regulators from launching any CDRs, with not a single Chinese technology firm jumping aboard so far.
Online parenting firm Babytree Group and AsiaInfo, the leading provider of telecom software and information-technology services, are among the mainland technology firms to have already submitted applications to the Hong Kong exchange.
The China Securities Regulatory Commission, the industry watchdog, also sets a higher listing threshold for start-ups, requiring any IPO applicant to have posted a profit before even filing papers.
In the first six months of this year, only four Chinese TMT companies completed IPOs in Hong Kong, but that number is expected to soar in the second half buoyed by rising enthusiasm in raising funds on the market, says Lin.
In July, Chinese smartphone maker Xiaomi netted HK$37.1 billion (US$4.7 billion) through an IPO before China Tower Corp, which operates the telecommunications towers for the world’s biggest cellular phone networks, completed a HK$54.3 billion share sale the following month.
Lin said Hong Kong’s efforts to ease listing requirements for tech companies have paid off handsomely, with reforms on both the city’s weighted voting right (WVR) structure and the allowing of pre-revenue biotech firms to list on the local stock exchange.
The WVR structure, or multiple classes of shares, also allows company founders to exert stronger control on a listed business, even with a minority ownership.
“Hong Kong has gained the upper hand in attracting hundreds of promising mainland tech firms hungry for capital,” said Ding Haifeng, a consultant with Integrity Financial Consulting.
“Over the next few months, it’s certain that more companies will consider listing in Hong Kong.”