Valuation Insights – Greater China Edition Fourth Quarter 2020

In the fourth edition of Valuation Insights, we highlight some interesting trends, regulatory developments and expert commentary from China and the rest of the world.

• Secondary Listings in Hong Kong and the Homecoming of U.S.-Listed Chinese Companies: The unexpected nature of the COVID-19 pandemic and the increasingly complex nature of geopolitical difficulties between the U.S. and China are rapidly changing the regulatory landscape for Chinese IPOs. The spotlight has intensified on the Chinese IPO landscape with the U.S. Congress passing legislation in early December 2020 that forced companies to delist from American exchanges unless they complied with U.S. accounting rules. As of October 2020, there were 217 Chinese companies with a market capitalization of $2.2 trillion trading on American exchanges, according to the U.S.-China Economic and Security Review Commission. During 2020, a spate of so-called “homecoming” listings raised billions of dollars in Hong Kong share sales. A secondary listing in Hong Kong allows Chinese companies to expand their investor base and serves as a hedging strategy against potential delisting in New York.
  

   

  The new Hong Kong regulation announced last year allows Chinese companies, which have corporate stockholders with enhanced voting rights and primary listings on a qualifying overseas exchange, to pursue secondary listings in Hong Kong. This new ruling has expanded the number of New York-listed Chinese companies that could list in Hong Kong from 20, excluding those already trading in Hong Kong, to as many as 60, according to analysts. For more details, please click here.
• HKEx Seeks Views on its Consultation Paper on Main Board Profit Requirement: On 27 November 2020, The Stock Exchange of Hong Kong (HKEx) published a consultation paper outlining a proposal to increase the Main Board HKEx Profit Requirement (“the HKEx Profit Requirement” or “HKEx Profit Requirement”). If implemented, the proposal would impact the market considerably, with the HKEx’s impact study assessing that 59% (437) and 65% (486) of companies making HKEx Profit Requirement Applications between 2016 and 2019 would have been ineligible for listing under Option 1 and 2, respectively, as shared below. The consultation period ends on 1 February 2021.
  

   

  The HKEx proposes to increase the HKEx Profit Requirement either:
  • Option 1: By 150%, based on the percentage increase in the Market Capitalization Requirement in 2018, which will increase the minimum amount of profit attributable to shareholders (i) from HKD 20 million (mn) to HKD 50 mn in the most recent financial year prior to listing and (ii) from HKD 30 mn to HKD 75 mn in aggregate in the two preceding financial years
  • Option 2: By 200%, based on the approximate percentage increase in the average closing price of the Hang Seng Index from 1994 to 2019, (i) from HKD 20 mn to HKD 60 mn in the most recent financial year prior to listing and (ii) from HKD 30 mn to HKD 90 mn in aggregate in the two preceding financial years

  The proposal to increase the market capitalization requirement of Main Board applicants to HKD 500 mn became effective from 15 February 2018. The Exchange observed that the increase in the market capitalisation requirement without a corresponding increase in Profit Requirement has resulted in the increasing concerns of small-cap issuers inflating valuation and reverse engineering to meet the market capitalisation requirement. For more details or to read the entire circular, please click here.

• Are SPACs Today’s Answer to the IPO?: Between January and August 2020, 84 special purpose acquisition companies (SPACs) successfully listed in the U.S., raising over $30 billion (bn) in proceeds and twice exceeding the 2019 whole-year total. In this blog, our experts from the Corporate Finance (CF) and Compliance Risk and Diligence (CRD) practices discuss the topic in detail.
• Industry Multiples-China edition: Our recently released report, Industry Multiples-China edition provides an overview of the market multiples of companies in 11 major industries in the Morgan Stanley Capital International (MSCI) China index based on the latest financial metrics available as of September 30, 2020.
• Private Equity Firms and ESG Due Diligence: Today’s investing environment is more challenging than ever for PE firms. It’s not just greater regulatory scrutiny and increased market volatility standing in the way of better returns. In Asia, more investors and regulators have joined the Environmental, Social and Governance (ESG) movement juggernaut. A massive shift of investment to ESG-managed assets may occur if the next Five-Year Plan links sustainability to corporate policy. In addition, limited partners (LPs) will look at managers’ ESG credentials, focusing both on how they impact and drive investment strategy, as well as their integration into managers’ internal policies and procedures, before committing capital to their funds. Read the full article here.

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We hope you will find this and future issues of the newsletter informative.