Capital Pulse – July 2020

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

Stock Code	Company Name	Country	Nature of Business	Primary Exchg.	Listing Date	Market Cap with IPO price (HKD Billion)	Delisting date	Delisting reason
09618	JD.com, Inc.	China	Information Technology – e-commerce, retail	New York	18/6/2020	596.5
09999	NetEase, Inc.	China	Information Technology – games and online services	New York	11/6/2020	421.8
09988	Alibaba Group Holding Ltd. – SW	China	Information Technology – e-commerce, retail, e-payment	New York	26/11/2019	3764
06288	Fast Retailing Co., Ltd. – DR	Japan	Consumer Goods – Apparel	Tokyo	5/3/2014	282
06813	CapitaMalls Asia Ltd	Singapore	Properties & Construction – Shopping Malls	Singapore	18/10/2011	30.265	22/7/2014	Restructuring into Parent
06388	Tapestry, Inc. – RS ( Formerly Coach Inc.)	USA	Consumer Goods – Apparel	New York	1/12/2011	141.54	2/3/2018	Low trading volume
00805	Glencore plc	Switzerland	Materials – Commodities	London	25/5/2011	3.716	31/1/2018	Low portion of shares on the HK Register
00847	KAZ Minerals PLC	Kazakhstan	Materials – Mining	London	29/6/2011	88.64	1/8/2018	Low portion of shares on the HK Register
01021	Midas Holdings Ltd	China	Materials – Alloy Manufacturing	Singapore	6/10/2010	6.43	1/8/2018	Insolvent: liquidated
01878	SouthGobi Resources Ltd	Mongolia	Energy – Coal Mining	Toronto	29/1/2010	20.36
06488	SBI Holdings, Inc	Japan	Financials – Securities, AM	Tokyo / Osaka	14/4/2011	17.405	25/6/2014	Low trading volume
06210	Vale S.A.	Brazil	Materials – Mining	Brazil / New York	8/12/2010	1337	28/7/2016	Low trading volume
00945	Manulife Financial Corporation	Canada	Financials – Insurance	Toronto	27/9/1999	46.464

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

Cause for Rejection	No. Applications
Commercial Rationale	16
Valuation	4
Suitability of Director / Person with substantial influence	1
Profit Requirement	1

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

Application Date	Company Year End	Must listing by (MB)	Must listing by (GEM)	Financial performance disclosures in the Application Proof (Main Board)	Financial performance disclosures in the Application Proof (GEM)	Financial performance disclosures in the Prospectus (Main Board)	Financial performance disclosures in the Prospectus (GEM)	Other Conditions
Between 1 January 2020 and 29 February 2020	31-Dec-19	No later than 31 March 2020	No later than 29 February 2020	2017, 2018, 9M2019	2018, 9M2019	2017, 2018, 2019	2018, 2019	HKEX-GL56-13, HKEX-GL25-11
Between 1 March 2020 and 30 June 2020	31-Dec-19			2017, 2018, 2019	2018, 2019	2017, 2018, 2019	2018, 2019	HKEX-GL56-13
Between 1 July 2020 and 31 August 2020	31-Dec-19			2017, 2018, 2019, 3M2020	2018, 2019, 3M2020	2017, 2018, 2019, 3M2020	2018, 2019, 3M2020	HKEX-GL56-13
Between 1 September 2020 and 31 December 2020	31-Dec-19			2017, 2018, 2019, 6M2020 / 9M2020*	2017, 2018, 2019, 6M2020 / 9M2021*	2017, 2018, 2019, 6M2020 / 9M2020*	2017, 2018, 2019, 6M2020 / 9M2021*	HKEX-GL56-13

* 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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