In an opinion piece titled: “Why do so many firms seeking growth in China overlook a Hong Kong listing?,” Ricky talks about why multinationals can also take a secondary listing or spin off a Chinese unit for a primary listing in Hong Kong.
Meanwhile, China’s forthcoming rules on overseas IPOs will apply to Chinese companies that want to list in Hong Kong, accordingly to the China Securities Regulatory Commission.
We are also pleased to launch the third edition of Industry Multiples in China. This report provides an overview of the market multiples of companies in 11 major industries.
Recent increased scrutiny of offshore-listed Chinese companies has continued to weigh on the stock prices of many Chinese firms traded on U.S. exchanges. Read our latest China Transaction Insights report.
Why do so many firms seeking growth in China overlook a Hong Kong listing?
Source: South China Morning Post
- So far, it’s mainly US-listed Chinese companies that raise funds in Hong Kong for regional growth
- But multinationals can also take a secondary listing or spin off a Chinese unit for a primary listing. Either allows the creation of a Chinese-registered entity ring-fenced from global operations and trade friction
After sharp contractions, many economies are bouncing back from Covid-19. Growth is now expected to stabilise, with mature markets returning to pre-pandemic levels. However, China stands out when it comes to long-term growth opportunities.
Foreign direct investment jumped 17.8 per cent in the first 10 months of this year, to 943 billion yuan (US$142 billion) according to China’s commerce ministry. As businesses plan for the future, one certainty is that they will continue to raise capital for growth.
Last year, nine China-headquartered companies listed in the United States used a secondary listing in Hong Kong to raise funds for regional growth. But many other multinational corporations seem to have overlooked this way of generating capital.
The Hong Kong stock exchange is one of the world’s largest markets for initial public offerings (IPOs). Last year, it raised more than US$51 billion, just behind Nasdaq’s US$57 billion. The appeal of the exchange is set to grow as it pushes reforms to streamline its listing regime for overseas issuers.
So far, it is mainly Chinese companies capitalising on this route to growth. Alibaba Group Holding set the ball rolling with a US$13 billion listing in November 2019.
Since then, other leading Chinese technology firms, including Baidu and JD.com, have followed suit. The nine Chinese companies that listed in Hong Kong last year accounted for 34 per cent of all funds raised on the exchange.
Multinationals can take advantage of this in two ways. The first is to undertake a secondary listing in Hong Kong. The second is to spin off a Chinese unit and seek a primary listing.
Both allow multinational companies to create a Chinese-registered entity ring-fenced from global operations and thus relatively insulated from trade friction. Some Western multinationals have done this. Anheuser-Busch InBev, for example, listed its Asia-Pacific operation on the platform in 2019, with a view to being involved in China’s premium beer market.
Fast Retailing, the business behind Uniqlo, also listed in Hong Kong to bolster its operations in mainland China, where it now has more than 850 stores.
When Macau opened up its casino market in the early 2000s, Western brands formed new entities such as Sands China and MGM China to raise funds on the Hong Kong stock exchange to build the resorts.
Insurers such as AIA and Prudential, luxury brands such as Coach, L’Occitane, Samsonite and Prada have also gone down this path, with several mining and mineral resource companies, including Swiss commodities giant Glencore International, Russia-based United Company Rusal, Brazil’s Vale and Yancoal Australia, taking a secondary listing in Hong Kong.
There are many more multinationals that could benefit from listing in Hong Kong as a platform for expansion into China. The appeal of the mainland market remains undimmed.
Per capita consumption in what is already the world’s second-largest economy is set to double by 2030. In absolute terms, China has the highest middle-class consumption and, within six years, this segment will number around 1.2 billion people.
To maximise this route, multinational businesses can study Chinese policies, which often provide clues. For example, spurred by incentives, China’s automotive sector leads the world in vehicle electrification, with more than 2.5 million new electric vehicles taking to the road in the first 10 months of this year.
This has put China’s electric vehicle roll-out ahead of targets and will create further opportunities in auto supply chains and related areas such as charging infrastructure.
Elsewhere, thanks to market reform, there could potentially be significant growth in financial services, particularly for insurance firms, asset management companies and brokerage houses.
In addition, several sectors have been growing at a fast clip and could offer attractive returns for foreign players. Among these, cinemas are expected to see an almost 224 per cent growth in revenue next year, according to research firm IbisWorld.
The cafe, bar and drinking establishments sector is also expected to see revenue growth of almost 27 per cent, close to the projected growth for department stores and shopping centres, and not far off predictions for the hotel industry.
The pipeline for secondary listings in Hong Kong is dominated by US-listed Chinese businesses. Western multinational corporations would do well to explore how a secondary listing or spinning off a separate China entity for an IPO in Hong Kong could provide the platform for growth in the world’s fastest-growing consumer market
China’s new rules on overseas IPOs will apply to Hong Kong, securities regulator says
- China’s forthcoming rules on overseas IPOs will apply to Chinese companies that want to list in Hong Kong, the China Securities Regulatory Commission told CNBC on Friday.
- In an exclusive interview with CNBC, the commission’s director-general of the international affairs department, Shen Bing, spoke about what draft rules will mean for Chinese companies that are planning to list in the U.S. and other markets.
- When asked whether the new rules would eliminate the possibility of any IPO being suspended two days before an expected listing, Shen said: “One of the purposes of these rules is to avoid such a situation, [with] more communication and more clear rules.”
Bejing — China’s forthcoming rules on overseas IPOs will apply to Chinese companies that want to list in Hong Kong, the China Securities Regulatory Commission told CNBC on Friday.
In an exclusive interview with CNBC, the commission’s director-general of the international affairs department, Shen Bing, spoke about what draft rules will mean for Chinese companies that are planning to list in the U.S. and other markets following last summer’s crackdown.
“By overseas, we mean, of course, you know, anywhere besides mainland China,” Shen said in a wide-ranging interview. “Of course it includes Hong Kong.”
Shen said the rules would apply not only to Chinese companies wanting to offer H-shares in Hong Kong, but also a category called “red chips,” which previously did not need the CSRC’s approval. H shares refers to stocks issued by mainland China companies that trade in Hong Kong, and red chips are Hong Kong-trade shares of companies that conduct most of their business in the mainland but are incorporated outside mainland China.
Since July 2021, a rush of Chinese IPOs to the U.S. has dried up. In the last several months, Beijing has overhauled the process for letting domestic companies raise money outside its borders through stock offerings.
One reason cited for the changes is national security, which Washington has also cited when it blacklisted some Chinese companies and moved to reduce U.S. investor exposure to stocks allegedly tied to the Chinese military in the last few years.
From Feb. 15, the increasingly powerful Cyberspace Administration of China will officially require data security reviews for certain companies before they are allowed to list abroad.
The CSRC and the State Council — the top executive body in China — have released more comprehensive draft rules, and the public comment period ended on Sunday. As proposed, the rules will require Chinese companies to file with the CSRC before listing overseas, and the commission said it would respond within 20 working days of receiving all materials.
The draft rules state that overseas listings are prohibited in some of the following situations:
- when other government departments consider the offering a threat to national security;
- if there are disputes over the ownership of the company’s major assets; or
- if there’s criminal offense by a controlling shareholder or executive within the last three years.
However, Shen said the rules would “not necessarily” prevent a Chinese company from listing overseas if it operated in an industry subject to restrictions or bans on foreign investment within mainland China.
The CSRC’s priority in 2022 is opening China’s market further to foreigners, Shen said. “Overseas listing is one part of the opening up regime, so I think [that] in itself would also be our priority.”
Slowdown in Overseas IPOs
In April 2021, about 60 Chinese companies were looking to go public in the U.S. That rush of New York listings essentially halted in the summer.
“We noticed the slowdown of overseas listing since the second half of last year, and we hope that with these new rules, things will resume,” Shen said, declining to comment on specific companies. “We hope the companies would make full use of these new rules, and to resume their listing in any overseas market.”
Shen said he recognized a strength of the U.S. market is “strong inclusiveness for new start-ups in new industries,” even as markets in Greater China have been catching up.
More Communication, Clearer Rules
When asked whether the new rules would eliminate the possibility of any IPO being suspended two days before an expected listing, Shen said: “One of the purposes of these rules is to avoid such a situation, [with] more communication and more clear rules.”
Shen confirmed again that Chinese IPOs overseas could use the variable interest entity (VIE) structure. “If they comply with relevant rules and regulations, they can still file with CSRC,” he said. “We will use the inter-departmental regime to verify the compliance issues before giving their filing a response.”
A VIE creates a listing through a shell company, often based in the Cayman Islands, which prevents investors in the U.S.-listed stock from having majority voting rights over the Chinese company.
Many Chinese companies have used the structure to list in the U.S.
Overall, Shen emphasized how the commission would like to keep the filing process “as efficient as possible” and said the commission is working with relevant departments to include more detailed guidance on how companies should communicate with regulators in order to list overseas.
“In this course, we may provide regulatory advice to [the] firms so that they do not waste time to do something that eventually would not be possible,” Shen said. He noted the CSRC’s 20-day response time would be separate from other departments’ review period.
Shen did not say when exactly the final rules would come out or be implemented.
“Relevant authorities have reached quite [a] high degree of consensus over the rules, so we would expect the procedural process for approval would be quite efficient,” he said, and added that he hoped for “early publication” of the final rules.
Investment Banks’ Concern
Some analysts have raised concerns about how the proposed rules might increase compliance issues for foreign banks that want to work with Chinese IPOs.
But Shen cast the rules as having a “very slight touch” approach in which investment banks need to alert the CSRC when they enter the business of underwriting Chinese IPOs, and annually disclose how many of those overseas listing projects they completed.
“We need to consolidate information [on overseas listings] from different sources,” he said. “From this report of the financial institution, we’ll know that there’s no kind of escape from the regulation.”