Capital Pulse – July 2020

Jul 21, 2020 | Articles, Global Markets Update

HEDGING LISTING POSITIONS

We provided an introductory discussion on secondary listing in the June edition of Lex Capitis. In this month’s Capital Pulse, we delve deeper into this category of listed companies and the renewed interest in this space.

The possible legislation of the Holding Foreign Companies Accountable Act (“HFAA”) and the timely creation of Chapter 19C in the Stock Exchange of Hong Kong (“Exchange”) listing rules (“Listing Rules” ) late last year has revitalised secondary listings in Hong Kong.

The recent listings of Alibaba, Netease and JD.com have raised HK$163.04 billion, and further similar secondary listings are expected. With the exception of these recent secondary listings, such listings have traditionally been far and few.

Typically, companies secondary list in Hong Kong because their business has a major exposure to Asia, but their home stock exchange is not based in Asia. Alternatively, Asian companies obtain a secondary listing in Hong Kong because most of its business are concentrated in Hong Kong and/or China.

However, from an investor point of view, secondary listings do not offer much to investors, unless there is an arbitrage opportunity in the IPO with its already listed shares in an overseas exchange, because investors can purchase those company’s shares in their home stock exchange. The only exception to this case is mainland Chinese investors that rely on the stock-connect arrangements with overseas stock exchanges to purchase international shares.

Since 1999, Hong Kong only had 13 companies that chose to obtain a secondary listing status in Hong Kong because these companies believed their business would benefit tangibly or intangibly from a secondary listing status. However, seven of these companies has delisted predominantly due to low trading volumes of its secondary listed shares. The history of secondary listed companies in Hong Kong since 1999 is presented in Table 1 below.

Given the current geopolitical environment, the HKEX might benefit from the return of large Chinese companies listed in the USA via a secondary listing and, thus, Hong Kong retaining its status as a premier exchange to raise capital in 2020. However, with the unrelenting ravaging impact of Covid-19 on the real economy, one would wonder whether there are any more rabbits left in the hat?  Perhaps recent announcement by the CEO of the HKEX not to renew his contract could be telling.

Table 1: Secondary Listings in Hong Kong

Source: HKEX, Bloomberg

WHY DID THOU REJECT OR RETURN?

The Exchange published its annual listing decision on applications that it rejected and returned in the past year. The primary cause for rejection is as follows:

Table 2: Reasons for rejection of IPO application

Source: HKEX-GL126-2020

The Exchange continues its practice to vet the commercial rationale for listing as the main factor in determining suitability. The question on valuation of the business usually rides on the back of the commercial rationale concerns. Based on the drafting of the rejection listing decision, it appears the failure to meet the profit requirement stems from a lack of understanding of the Listing Rules. These rejection highlights the importance of careful homework, planning and independent advice on the part of these companies that would have saved them a lot of money and heartache.

The Exchange highlighted two returned applications last year and provided more guidance on the inclusion of financial information rule on the application process which may suggest a substantial number of applications were returned as it fell afoul of this rule.  For simplicity, we provided a tabular version of the guidance.

Table 3: Financial Performance disclosure requirements

* Depending on availability

Source: HKEX-GL127-2020, HKEX-GL56-13, HKEX-GL25-11

Although this appears to be a simple guidance to follow, there were media reports of a large biotechnology company that, was listed earlier this year, had its initial application for IPO returned because it did not adhere the guidance above.

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Market Update: July 2020

Jul 9, 2020 | Articles, Global Markets Update

Market View

Wild Horses

In June, risk markets defied rapidly rising new COVID cases in the US and powered higher. Admittedly, the 1.8% rise in the S&P 500 was primarily driven by a 7% rise in the Information Technology and a 5% rise in Consumer Discretionary sectors. Commodity markets also took an optimistic view, choosing to focus on the loosening of restrictions rather than the continuing rise in new COVID cases that reached over 200,000 per day. This seems to be affirmation of two beliefs; 1) China’s recovery was gaining traction, and 2) the bet that 2nd wave cases would not result in the wholesale global return of mobility restrictions. This led to WTI oil and copper prices to surge 11% and 12% respectively. Equity markets and currencies that had significant commodity exposure rose accordingly. The once popular economic indicator, the Baltic Dry Index, shot up 260%, mainly on the back of increased iron ore shipments to China.

Source: Bloomberg

Indeed, China’s improved industrial production, industrial profits and retail sales numbers for May provided a sense of economic stability. When the positive PMI figures were released at the end of June, indicating an improving trend, China’s equity markets initiated one of its infamous “ears pinned back” rallies. Just one week into July, the CSI 300 has jumped 14% and the MSCI China Index has scrambled to keep up with a 9% surge. While the economic data provided a supportive backdrop, it has been the media drive by the government for people to invest in the equity market that is likely to have had a material impact to the speed of the rise. This is reminiscent of the 2015 boom bust where the CSI 300 doubled in just two months but then gave back 80% of the climb in the subsequent two months. The whole up and down move was largely due to government encouragement and then cessation of the media campaign. Hopefully, experience will temper the market enthusiasm this time.

Tail of 4 Markets

The reliability of China’s economic data has been in question since the 1990’s. If we assume it’s a reasonable representation, based on simple PMI comparisons it could be argued that China’s equity market performance should, indeed, be ahead of other major markets. China only suffered one dramatic month’s dip in PMI before heading back to growth again. Other major regions have suffered 3-4 months of below 50 readings. China’s equity market did not fall dramatically until markets in other regions began to plummet. This occurred when you could argue China’s economy was already stabilising.

Source:  Bloomberg

Source:  Bloomberg

The other point worth noting is that both the best performing indices, CSI 300 and S&P 500, have less exposure to offshore revenue than either the Topix or the Stoxx 600 that have more than 60% of revenue from offshore. The means any stimulus is likely to be more efficient for the companies in the China and US indices.

Laggards Still Lagging

The market likes what it likes. Currently that does not include banks and industrial stocks, globally. These sectors tend to be more exposed to lockdown restrictions that have been slower than expected to unwind. In a related statistic, in June, US Growth stocks rose 4.1% while Value stocks fell 1% to continue a well-worn path for the last 10 years with the rise and rise of tech stocks. The eventual recovery of the laggards probably heralds the final phase of the equity market dislocation.

This laggard theme also extends in a smaller scale to the credit markets where Asia corporate bonds remain 230bp wide of US corporate bonds. However, Asian bond credit spreads are steadily grinding tighter against their US counterparts, making it an easier choice than exposures to nominally cheap but unloved stocks.

Source:  Bloomberg

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