The US stock exchanges of New York and the Nasdaq have long competed with bourses in Hong Kong and China. One of the biggest battles has been in wooing companies operating in the new economy sector, which includes high-growth industries focused on developing cutting-edge technology.
In this battle, the US has traditionally been the winner. Technology companies tend to flock to the US, listing mainly on the Nasdaq through IPOs of American Depository Shares (ADS).
But 2020 is set to be a turning point for Hong Kong.
“We will see more companies coming back from the US for dual listings,” says Niccolo Manno, head of Asia ECM syndicate at JP Morgan. “Larger companies will find it easier. With a more established investment community now in this region and the HKEX’s efforts to improve the listing process for those companies, you will see more companies looking to list here than previously.”
The first US-Hong Kong dual listing came from technology company Alibaba Group Holding in November 2019. It raised HK$101.2bn ($13.1bn) from a secondary offering on the HKEX.
A capital markets lawyer with an international firm in Hong Kong says that there were a lot of discussions over whether a second listing by Alibaba in Hong Kong was a good or bad idea.
“There are certain types of investors that would prefer to invest on the US exchanges and others that would prefer to invest in Hong Kong, and for companies that are substantial, like Alibaba and JD.com, both are,” reckons the lawyer.
Alibaba’s success is paving the way for others to follow suit.
E-commerce peer JD.com mandated banks in March for its Hong Kong secondary offering, expected this year.
Chinese travel service provider Trip.com, online gaming company NetEase and search engine Baidu are also said to be in talks with banks for dual-listings in Hong Kong.
“Chinese tech companies, in the past, were able to sell US investors a good story and then they managed to do very good IPOs,” says a Hong Kong-based IPO consultant. “The US is one of the places where you can get a high valuation without a positive cash flow.
“Chinese companies think the US is a good place to go because investors there recognise a company’s future value,” he adds.
But that is no longer the case. After a big spike in US IPOs of Chinese companies from 2018, their popularity has gone down after consistently poor aftermarket performance.
The result? IPOs are raising considerably less than their placeholder size — set when listing documents are filed with the US regulator.
They are also more ‘friends and family’ deals, where either a large part of the stock was bought by investors close to the issuer or these investors boosted the orderbook sizes with oversized bids.
US out, Hong Kong in
The China-US trade war also inadvertently forced Chinese companies to change tack.
The conflict between the two countries made the prospect of floating in the US harder for mainland-based issuers. The appeal of a listing in Shanghai’s tech-focused Star Market, or the Hong Kong exchange, increased.
“The relationship between the US and China and the impression of Chinese companies will [affect] their valuation and performance,” says Ringo Choi, Asia Pacific IPO leader at EY. “With the trade argument between the US and China and the talk of poor governance of mainland companies, you can easily imagine how difficult it will be for them to go public or convince investors that they are a good investment.”
The Hong Kong-based capital markets lawyer adds that the appetite of Chinese companies to float in the US, and the interest from US investors in Chinese opportunities have gone down directly because of tensions between the two countries.
This means that only the “most committed companies” from the mainland opt for a US listing now, adds the lawyer. If they are on the fence or uncertain about the right listing venue or market, they end up ditching the US.
What had been one of the US stock markets’ primary attractions, freer regulation, has also increasingly become less important.
This is mainly because the HKEX has taken big steps to become more like a US stock exchange.
In 2018, the HKEX introduced a new chapter to its rules that allows dual-class share IPOs and listings by some pre-revenue firms.
Shanghai’s Star Market is also offering issuers increasing flexibility, introducing a registration-based IPO process for companies — a first in China.
“There is less of an incentive now to go to the US,” says a senior equity syndicate banker in Hong Kong. “There were reasons in the past why people went to the US. Some of them still exist, but the majority of the market is ready in Hong Kong.” GC