That's the first time in three years that the city lost its coveted fundraising top spot to New York -- and the first time ever to fall behind Shanghai. But early forecasts suggest it may reclaim its crown in 2018 amid tighter scrutiny in mainland Chinese markets, and new listing rules planned for the HKEx (Hong Kong Exchanges and Clearing) this year, which are expected to attract more "new economy" companies.
Ever since losing the mega e-commerce Alibaba listing in 2014 to NYSE (New York Stock Exchange), the Hong Kong bourse has been atoning for the colossal face-losing moment. This however, may be the game-changing year to win over a new wave of Chinese movers and shakers in technology. Charles Li, head of HKEx said in December that he would be announcing a structure where companies with duel-class shares can be listed on its main board. The city's financial secretary also indicated the likeliness of new voting arrangements in the second half of the year. In further support of what appears to be an imminent policy, the financial hub's chief executive Carrie Lam openly invited Alibaba to bring its listing back to the city -- an offer Jack Ma reportedly claimed he would "seriously consider."
Current rules mandate a long-held principle of one-share, one-vote for companies listed on the HKEx. Weighted-voting rights differ in the equity power of shares. The most common form is the dual-class structure with typically Class A and Class B. Class A common stock carries one vote per share, while shares of the other class carry multiple votes. There are cases where one class holds no voting rights or limited rights under certain circumstances. Inferior rights are generally issued to the public whereas voting power shares are held by founders, directors, and management.
The argument for dual-class listings is that it enables founders and management to retain control over the strategic direction of the company even after a public listing. For innovative new economy companies, many will go public before having a track record of being profitable. Therefore, they require a longer-term growth approach as opposed to focusing on immediate returns.
Under these circumstances, the company may be vulnerable to takeover attempts, and the unequal voting power serves as a tool to defend against hostile offers. "We expect to see a renaissance in Hong Kong and China trading volumes and primary activity," says Tucker Highfield, managing director and head of Asia Pacific equity capital markets syndicate at Credit Suisse. He believes the relaxing of rules will "lead to higher quality listings, increased market caps and trading volume expansion."
Hong Kong's equity market is driven by both by global and mainland liquidity. With the establishment of the stock connect scheme with Shanghai and Shenzhen, the role of mainland investors in the special administrative region has grown. HKEx's Li has also signaled his eagerness to push a new program called "Primary Connect," which makes it easier for mainland investors to buy into Hong Kong-based IPOs.
Meanwhile, global liquidity is looking for exposure to Chinese assets and, outside of New York, Hong Kong is the prime location. "We will likely see more U.S.-based investors open offices in Hong Kong and increase their investments here... in combination with demand from China and retail investors, (leading to) robust valuations," Highfield forecasts.
New economy listings
According to Deloitte figures, Hong Kong completed 161 new listings in 2017 raising $16.3 billion. The number represents a growth in the number of IPOs, but a slip in the overall proceeds compared to the previous year -- because of deal size. However, Edward Au, co-leader of the national public offering Group at Deloitte China, points to the positive of record high number of IPOs from overseas companies due to an improved market valuation. "The sentiment resulted from the anticipated interest rate hike timetable, China's 19th Communist Party Congress and more southbound capital inflows," he says.
Almost 160 companies have already submitted IPO applications to the HKEx, and at least five of them are expected to be mega offerings. Beijing-based smartphone maker Xiaomi is in talks to raise at least $50 billion, which would likely become the biggest tech listing ever, double the size of Alibaba's. And a slew of new economy firms are anticipated to pull the trigger this year, from ride-hailing Didi Chuxing, to news aggregator Toutiao, Tencent Music, food-to-hospitality booking site Meituan-Dianping, and Baidu's video streaming site iQiyi. Hong Kong will be going head-to-head with New York to lure them in.
We've already seen a strong start to the year with Hong Kong's biggest fintech listing, Lufaxexpected to file in April. The peer-to-peer lender backed by Ping An Insurance and worth an estimated $60 billion, has become China's second-most valuable fintech firm, just shy of Ant Financial's valuation.
If demand for recent listings on HKEx is anything to go by, Hong Kong looks set for a strong vintage to go against America's new darlings, nicknamed SLAW: Spotify, Lyft, Airbnb, and WeWork-- all in various stages of preparing to go public.
Seen through the listing of C-Mer eyecare at the start of 2018, the IPO priced at the top end of the range was 1,500 times oversubscribed, drawing in the heaviest interest in over a decade. Similar cases were common last quarter -- Yixin Group, an online car-loan provider backed by Tencent, was more than 500 times oversubscribed when it went public in November, while Razer, which makes computer accessories for games, saw its offering oversubscribed 300 times.
Pamela Ambler, Forbes Staff