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Asia CommentGC Asia View

ECM banks need to reposition

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Only the most diversified and agile investment banks will reap the rewards from the changes to China ECM

Equity capital market houses are seeing a fundamental shift to their Greater China businesses — a shift that could help banks make their client offerings stand apart from the rest.

The Chinese government’s crackdown on US listings from Mainland companies has led to a rapid change in the region’s ECM this year.

Firms once considering a New York IPO are having to re-think their plans, and in some cases shelve a listing altogether in favour of other forms of fundraising. Not all issuers are created equal, but neither are Asia’s stock exchanges nor the banks operating in ECM. This means franchises need a comprehensive China platform if they want to emerge victorious.

There has been a trickle of American depository share (ADS) listings by Chinese companies since relations between the countries’ IPO markets froze in July 2021.

Beijing stunned investors when it launched a cybersecurity probe into ride-hailing firm Didi just days after its $4.4bn New York Stock Exchange listing, wiping billions of dollars off its market capitalisation.

Deal flow dried up soon after. The only China-into-US IPO over $100m since the summer was a $325m float by LianBio in late October. But the biotechnology firm is an exception — it is jointly headquartered in the US and China, and its listing was handled by the underwriters’ US bankers.

In Hong Kong, ECM teams at bulge bracket banks and regional firms are having to adapt. For some issuers, the IPO market is no longer the best fundraising option, be it in Hong Kong or in onshore China.

This raises a key question: how can banks still win ECM business, while offering their clients the best solutions?

Banks that have teams bridging the Mainland and Hong Kong, particularly with strong onshore joint ventures, are best placed for the time being. A Shanghai or Shenzhen listing will work in some cases, while for others, floating on the HKEX would be the way to go. But both markets have stricter regulations than the US.

Not just anyone can list in Hong Kong, for example. China’s homegrown start-ups have to prove they are “innovative” if they want to float with a dual-class share structure, according to the HKEX. Pre-revenue biotech firms, on the other hand, must meet an array of criteria, covering market capitalisation, products and patents, use of proceeds and post-listing working capital enhancement.

This means some firms won’t be able to list in Hong Kong or onshore in China. Private placements, instead, have risen in popularity, especially among Mainland-based start-ups that can no longer access the rich valuations and deep pool of sophisticated investors in the US.

At some banks, the split between private funding, onshore listings, and Hong Kong IPOs is already near equal, GlobalCapital Asia understands.

This change in the ECM landscape began appearing as far back as 2019, with the launch of Shanghai’s Nasdaq-style Star board.

In Hong Kong, it took the form of secondary offerings by US-listed Chinese companies. The trend of so-called homecoming listings began with Alibaba Group Holding in November 2019, before picking up pace following deals by JD.com and NetEase in June 2020. The last homecoming listing was by Xpeng Motors. The NYSE-traded electric vehicle maker listed for HK$14bn ($1.8bn) on July 7.

China’s major US-listed names had taken up the HKEX on its offer of secondary listings. Optimists saw homeward bound fundraising trickling down throughout the market, while issuers also had a new IPO destination onshore.

But Beijing’s crackdown on overseas listings accelerated the change and, in many cases, turned a desire for local fundraising into a necessity.

As the ground shifts below their feet, ECM houses that cannot serve clients onshore and offshore with various products must reposition themselves, or risk losing out.

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