Many signs suggest there may be fewer China new lists at the New York Stock Exchange or the Nasdaq for the foreseeable future. China’s review of cybersecurity rules for overseas listings has hit DiDi Global, among others. The U.S. is temporarily holding up China listing approvals in connection with disclosure concerns.
What’s a brave China investor to do? One option: buy shares in Hong Kong Exchanges & Clearing, or HKEX, which operates the Hong Kong Stock Exchange. Even before the recent crackdowns, Hong Kong had already been expected to benefit from a growing number of listings by mainland technology companies and secondary listings by Chinese companies whose shares trade as American Depositary Receipts, or ADRs, in New York or on the Nasdaq.
Newer mainland regulatory rules may make the Hong Kong Stock Exchange more attractive, some analysts say. Underscoring its pull, the Financial Times reported today that ByteDance, the Beijing-headquartered owner of short-video app TikTok, “has addressed regulators’ data security concerns in (a) bid to list by early next year” and aims to trade in Hong Kong despite China’s tech crackdown. (See related post here.)
“Overall, we believe the proposed revision of the rules (by Beijing) should benefit HKEX in the medium to long term,” China Galaxy International said in a research report dated July 11. J.P. Morgan (a HKEX shareholder), in a report dated July 14, said: “HKEX is a key capital-raising and trading venue, especially for large Chinese companies. The move of ADRs to HKEX and the shifting of primary listings should solidify HKEX’s position as an IPO venue, even without geopolitics.”
J.P. Morgan has a HKEX price target of HK$570; China Galaxy’s target is HK$557.40. That compares with its close of HK$529.50 in Hong Kong on Friday. The stock has gained 42% in the past year.
Stock trading in Hong Kong goes back to the mid-19th century; the first formal market – the Stockbrokers Association of Hong Kong – was set up in 1891. It merged with the Hong Kong Stockbrokers’ Association in 1947, and then with three others – the Far East Exchange in 1969, the Kam Nan Stock Exchange in 1971 and Kowloon Stock Exchange in 1980, creating the Stock Exchange of Hong Kong in 1980. That exchange later joined with the Hong Kong Futures Exchange and Hong Kong Securities Clearing Co. under one holding business that listed itself in 2000.
By then reforms in China helped to pave the way for H-share listings in the 1990s; in the next decade, even larger IPOs by state-owned enterprises and private sector mainland companies followed. Hong Kong over time managed to find policy alignment with Beijing to facilitate capital movements and listings. HKEx international advisory council members include Joe Tsai, the billionaire vice chairman of Alibaba, and Neil Shen, the billionaire founding partner of Sequoia Capital China.
HKEX, already benefitting from a wave of IPOs in recent years, has entered a new era in 2021 with the appointment of its first foreign CEO in May, long-time J.P. Morgan executive Nicolas Aguzin. Aguzin hasn’t done any media interviews since. He wrote on the exchanges blog in June: “China’s economic growth and steady financial liberalization have played a key role in HKEX growth over the past 21 years, and we remain poised to benefit from these and other macro trends in the years ahead.” Aguzin added: “Against a fractious macro backdrop, our role as gateway is perhaps more relevant and more needed than ever before.”
Even before recent U.S.-China tension, Hong Kong was expected to play a bigger role for technology listings. “I think there will be a bigger role for Hong Kong to play,” Jixun Foo, managing partner of global venture capital investment firm GGV Capital and member for the 2021 Forbes Midas List, said in an interview in June. “Hong Kong has actually come a long way. Ten years ago, we wouldn’t have thought of Hong Kong as a strong alternative” for tech listings to U.S. exchanges, he said. “Today, I think HK has become a stronger alternative,” Foo said.
For their part, fund managers will likely follow good Chinese companies to the exchange where they list, he said. “They are looking for returns, and still have to find those returns for their stakeholders,” Foo said.
Aguzin cited fundraising by new economy businesses as well as biotech firms as HKEX opportunities. “I see great opportunity in funding the growth of the New Economy, including biotech,” he said. “These are the companies that will shape our markets in the decades to come. Since the launch of HKEX’s new listing rules in 2018, we have become the second largest market in the world for biotech capital raising, and our pipeline looks strong.”
“Covid has put global health in the spotlight, and we are committed to supporting both corporates and investors in this sector, making Hong Kong a true biotech hub, welcoming participants not just from China but from around the world,” Aguzin said. Healthcare and medicine-related listings in Hong Kong this year include CARsgen Therapeutical, which raised HK$1.5 billion, Keymed Biosciences, which also raised HK$1.5 billion and Sequoia-invested Brii Bioscience, which raised HK$1.2 billion. Nasdaq-traded Trip Group, China’s largest online travel site, raised HK$932 million in a secondary listing in April.
Huatai Financial Holdings (Hong Kong) in a report on July 2 suggested HKEX trading volumes could benefit from more listings there by Chinese companies currently listed overseas. “We think turnover gradually shifting from the U.S. market to Hong Kong for these secondary listings and improved market structure could help velocity improve slowly,” It identified downside risks as “volatile market performance,” higher interest rates and regulatory risks.
However, stock investors have already bid up HKEX’s share price well beyond’s Huatai’s target price of HK$507 as of that date.
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