Listings on the Hong Kong stock exchange are set for another big year after last year’s near-decade-high peak, as the lofty valuations fetched by the private market cool and patriotic homecomings pick up in the footsteps of e-commerce giant Alibaba.
US-listed Chinese tech companies are reportedly seeking secondary listing in Hong Kong on the heels of Alibaba, which listed last November following a rule change that allowed companies with dual class share structures to list.
“Excluding Alibaba and OTC listings, you have more than 100 Chinese companies with a market capitalization of $500 billion,” said Frank Benzimra, head of Asia equity strategy at Societe Generale. “With the HK Exchange having changed its rules to include dual share class, which is a structure common to many internet companies, we could expect to see more listings in Hong Kong.”
This could mean the deal flow momentum will continue for the Hong Kong exchange after listing volumes soared to $40.3 billion last year, the highest since 2010. In the first three weeks of 2020, volumes have already reached $1.1 billion, according to Dealogic.
“In mid-January 2020, we welcomed 19 new listings over a single week, the highest ever,” said a HKEX spokewoman indicating the momentum was continuing.
Stephen Chan, Hong Kong-based partner at law firm Dechert said listings would be easier as regulatory hurdles, such as the restrictions on weighted voting right structure and confidentiality issues in relation to the filing of the listing application for secondary listing, had been eliminated. These had inhibited unicorns from listing in prior years.
This reform as well as Alibaba’s solid post-listing performance changed the environment for tech companies.
“We would expect more US-listed PRC tech companies to conduct a “homecoming” listing on the HKEx in the coming year,” said Chan.
Media reports have said Baidu, Ctrip and NetEase are making internal evaluations about a secondary listing in Hong Kong. These evaluations continue even though the economic benefit of such a listing is unclear.
“The US-listed Chinese companies will also seek secondary listings in Hong Kong as I believe there is a political push. There is no economic benefit to such a dual listing as these companies are fully priced in US markets. Dual listing can create arbitrage opportunities but these will be very short term as arbitrageurs will take full advantage once the price differences occur,” said Nitin Dialdas, CIO of Mandarin Capital.
Private placements wane
Companies seeking to raise capital in the past have been attracted to the private placement market because of better valuations and less intense scrutiny compared with public markets. The valuation gap is contracting.
Xiaomi saw trading in the private markets at valuations as high as $75 billion but now trades at a valuation of around $40 billion after listing at $50 billion. Uber and Meituan saw similar declines in their valuations after listing.
“The WeWork debacle should reverse that trend and see private market valuations become much more realistic. Chinese companies have pressures to raise capital, because external flows have dwindled following the capital restrictions, which will see them continuing to support the HK IPO market,” said Dialdas.
“The private market premium over the public market has narrowed given the capital restrictions on moving money out of China and this will drive more companies to the IPO market.”
PwC said in a report earlier this month it expects Hong Kong to be one of the top three global IPO fundraising markets in 2020 and has forecast the exchange to raise HK$230 to 260 billion in 2020.
“Riding on the success of listing regulations reform, more new economy enterprises are expected to seek listing opportunities on HKEX,” the firm said in a report. “The H-share full circulation program will help attract more Chinese enterprises to list on HKEX and also increase H-shares circulation volume. Judging by the number of existing listing application submissions, listings of overseas companies in Hong Kong are expected to remain active in 2020, with the possibility of increasing numbers compared to 2019.”