Introduced in November 2013, the DLF allows Chinese companies to list directly on the Singapore Exchange (SGX) in a way that is identical to H-share IPOs in Hong Kong.
The framework was branded as a key way for Singapore to level the playing field with rival Hong Kong, which has benefited immensely from the constant flow of H-share listings over the years. Of the HK$74.8bn ($9.65bn) of volume generated from Hong Kong IPOs this year, nearly 86% are from Chinese companies, according to Dealogic.
A lot was, therefore, expected of Jiangling Chassis as it was the first to adopt the framework. Joint bookrunners CICC and DBS went as far as to market the shares at a 1x price-to-book ratio, the minimum allowed under Chinese regulations, to appeal to investors.
But that proved to be for naught as the cheap valuation was no match for a global equities rout over the past few weeks, brought about by fears over China’s worsening economy. Investors adopted a risk-off mentality, sold off emerging markets in bulk and the deal collapsed.
“Investors are just not keen on deals right now given the turbulence in the global market, and especially in China and Hong Kong,” said a banker close to the trade.
Although Jiangling Chassis was forced to pull its IPO, the banker said it should not be taken as a sign the DLF is a failure.
“Everyone understands that Jiangling Chassis had to be shelved because of timing. The framework is still relevant as Chinese companies always have a need to diversify their funding channels outside of China and Hong Kong, and the SGX is a good way to do so.”
Poor to begin with
A source close to the deal, who has also been speaking with his clients in China about potential listing destinations, pointed out that Singapore has been struggling to gain attention from Chinese companies. The fact that it took more than 20 months for the first deal under DLF to materialise is a clear reflection of that.
“The whole DLF concept was basically a G-to-G [government-to-government] thing,” the source said. “The rationale of DLF is sound because it sort of puts Singapore on the same playing field as Hong Kong, but even I can’t think of a reason why a Chinese firm would pick SGX.”
Singapore has yet to record a mainboard listing this year and poor liquidity is a big reason why it remains pitifully ineffective at attracting IPO traffic. Securities turnover on the SGX was S$24.2bn ($17bn) in July compared to HK$2.75tr ($355bn) on the HKEx.
While the source concedes that Singapore has a natural disadvantage due to its small size, there are still ways for it to boost liquidity, such as by providing tax breaks for foreign investors when buying Singapore listed stocks.
The prime candidates such a move would attract are Chinese banks and insurers, which are huge buyers of stocks in Hong Kong.
“There isn’t enough liquidity in the Singapore market, so when things turn volatile it shuts straight away,” the source said. “It’s unfortunate because this IPO was supposed to be a market opener, but a lot of Chinese companies looking at this will now think it’s probably safer to spend their time and money on a Hong Kong listing instead.”
Rewind the clock
SGX toughened its listing requirements in August 2012, ramping it up to more or less on par with Hong Kong. But that was a huge mistake, according to the ECM head, because it pushes smaller companies away.
“We’re basically stuck in no man’s land,” the ECM head said. “Singapore needs to realise there’s no point competing with Hong Kong and start re-focusing its efforts on carving out a place for itself.”
That would mean unwinding some of the measures introduced in 2012 and allowing smaller companies, which would otherwise not be eligible or suitable to list, back to Singapore instead.
A Hong Kong-based capital markets lawyer pointed out that now would be a good time to do just that given the change in leadership at the SGX. Loh Boon Chye, a former senior executive of Bank of America Merrill Lynch, took over the reins from Magnus Böcker in July.
“It will be a slap in the face of the previous administration, but it’s the perfect opportunity to right some of the mistakes the SGX made,” the lawyer said. “The new CEO has a lot on his plate, but I’ll be very surprised if this is not at the top of his list.”
The presence of the DLF should also encourage Singapore to revert to less stringent listing requirements.
Previously, Chinese companies trading on the SGX were mostly red chips, or shells incorporated overseas. The revenue generating operations, on the other hand, continued to sit onshore in China.
But such a structure had a serious flaw when it came to regulatory reach since local authorities in China will only act if an offence has been committed under domestic law rather than overseas law.
This problem came to prominence following a series of accounting scandals involving Chinese companies that were listed in Singapore, as well as elsewhere.
When the scandal broke, many investors were burnt, which was why the SGX toughened its listing regime in 2012 to ensure that only the stronger companies would be eligible to list.
Listing via DLF, however, will automatically subject a company to the laws of both jurisdictions, meaning concerns over regulatory reach are no longer applicable.
“I still think that the DLF is a good idea, but SGX needs to change to fully tap into the framework’s potential,” the lawyer said. “If it doesn’t, then I’m afraid we won’t see much issuance out of it.”