Hong Kong Listings Offer Ring-Fenced Route to China

By Ricky Lee, Managing Director of Valuation Advisory Services, Duff & Phelps, A Kroll Business

During 2020, nine China-headquartered companies listed in the US used a secondary listing on the Hong Kong stock exchange (HKEX) to raise funds for regional growth. However, other multinational corporations with head offices in the West seem to be overlooking the potential gains on offer from generating capital via this route.

Hong Kong ranked as the world’s second-largest initial public offering (IPO) market in 2020, where HKEX had raised almost USD 51.3 billion, trailing behind Nasdaq (USD 57.3 billion raised).[1] There is a growing appetite for IPOs following a March announcement that HKEX would be seeking proposals to streamline its listing regime for overseas issuers.

So far, though, it is mainly Chinese companies that are capitalizing on this route to growth. The nine Chinese companies that were listed on the HKEX last year accounted for 34% of all funds raised on the exchange. Chinese tech giant Alibaba set the ball rolling on the current wave of activity with a USD 13 billion listing in November 2019. Since then, other leading Chinese technology brands, including search engine firm Baidu and e-commerce behemoth JD.com, have followed suit.

An ideal springboard for China market expansion

In fact, many more multinationals could benefit from an HKEX listing as a platform for expansion in China.

A few western multinationals did go down this route in earlier years. Anheuser Busch, for example, listed its Asia Pacific operations on the platform in 2019, to target China’s premium beer market. Fast Retailing, the business behind high street fashion brand Uniqlo, is also listed on the HKEX to bolster its operations in China, where it now has more than 800 stores. When Macau opened up its casino market in early 2000s, Western brands formed new entities such as Sands China, Wynns Macau and MGM China to raise funds on the HKEX that would build the new resorts. Insurers such as AIA, Prudential and Mutual Life, consumer brands like Coach, L’Occitane, Samsonite and Prada have also gone down this path, as have several mining and mineral resources companies, including Swiss commodities giant Glencore International, Russia-based United Company Rusal, Brazil’s Vale and Yancoal Australia.

Having a primary or secondary listing in Hong Kong will allow multinationals to raise money “In China For China.”

The Chinese consumer market is set to double its size by 2030.[2] In addition, China’s middle class will grow to around 1.2 billion people in 6 years, which is equivalent to a quarter of the world’s total population.[3]

The appeal of the Chinese market for international businesses remains undimmed. Yet, breaking into this market remains complicated, as it requires significant amount of capital investment on business setup, channel development, brand building, etc.

“In China, For China”

Against this backdrop, having a primary or secondary listing in Hong Kong will allow multinationals to raise money “In China For China.” Hong Kong is well endowed with capitals from international institutional investors, Mainland Chinese investors, Qualitied Domestic Institutional Investors (QDIIs); through the Shanghai-Hong Kong Stock Connect— these investors can access the Chinese market. This means that there is high liquidity for further fundraising in Hong Kong’s capital markets.

Multinationals can take advantage of this in two ways – 1) undertake a secondary listing on the HKEX, or 2) spin off a China unit and seek a primary listing.

Both routes allow multinational companies to create a Chinese-registered entity that is ring-fenced from global operations and thus relatively insulated from trade frictions with other countries. An HKEX listing also provides a way of navigating China’s strict capital controls.

Opportunities unfound elsewhere

COVID-19 has changed the economic profiles of countries around the world. After sharp contractions, many economies are bouncing back to strong levels of growth. At some point, however, this will stabilize.  Growth rates will be back to the pre-pandemic levels in many of the mature markets, where avenue of growth is hard to come by.

Access to the China market provides opportunities that simply do not exist to the same degree elsewhere. Foreign direct investment (FDI) into China in the first eight months of 2021 jumped 22.3% from the same period last year to CNY 758.05 billion (USD 117.7 billion), according to China’s Ministry of Commerce.[4]

Chinese policy direction provides clues about which market segments could provide the biggest opportunities for foreign players. Spurred by incentives, for example, China’s automotive sector leads the world in vehicle electrification, with almost 1.8 million new electric vehicles taking to the road in the first eight months of this year.[5] This has put China’s electric vehicle rollout ahead of targets and will no doubt create spill over effects not only in auto supply chains but also in related areas such as charging infrastructure.

Furthermore, thanks to market reform in China, there is significant growth potential in financial services, particularly for insurance firms, asset management companies and brokerage houses. In addition, there are several sectors that have been growing at a fast clip and could offer tempting returns for foreign players.

Among these, cinemas are expected to see an almost 224% growth in revenue between 2021 and 2022, according to research firm IbisWorld.[6] Revenue in the food and beverage sector, meanwhile, is estimated to grow by almost 27% in 2022, close to the projected growth for the department store and shopping mall and hotel industries.

Currently, the pipeline for secondary listings in Hong Kong is dominated by Chinese businesses listed on US stock exchanges, but western multinational corporations would do equally well for an IPO in Hong Kong – the platform for growth in the world’s fastest-growing consumer market. This will position Hong Kong as a truly international capital market with a diverse portfolio of investments.  

About the Writer:

Ricky Lee is a managing director in the Valuation Advisory Services to lead the financial valuation practices in Hong Kong and has provided independent valuation services on business enterprises, intangible assets, portfolio investments and financial instruments in Greater China and Asia for more than 20 years.

About Duff & Phelps, A Kroll Business

For nearly 100 years, Duff & Phelps has helped clients make confident decisions in the areas of valuation, real estate, taxation and transfer pricing, disputes, M&A advisory and other corporate transactions. For more information, visit http://www.duffandphelps.com.

About Kroll

Kroll is the world’s premier provider of services and digital products related to valuation, governance, risk and transparency. We work with clients across diverse sectors in the areas of valuation, expert services, investigations, cyber security, corporate finance, restructuring, legal and business solutions, data analytics and regulatory compliance. Our firm has nearly 5,000 professionals in 30 countries and territories around the world. For more information, visit http://www.kroll.com.

Please contact us if you’d be keen to discuss this topic with us in more detail.

[1] https://www.sovereigngroup.com/news-and-views/hong-kong-ranks-as-2nd-largest-ipo-market-in-2020/

[2] https://www.cnbc.com/2021/01/29/chinese-consumer-spending-to-double-by-2030-morgan-stanley-predicts.html

[3] https://www.brookings.edu/wp-content/uploads/2020/10/FP_20201012_china_middle_class_kharas_dooley.pdf

[4] https://www.reuters.com/article/china-economy-fdi-idUSB9N2PY01M

[5] https://asia.nikkei.com/Spotlight/Electric-cars-in-China/Surging-EV-sales-put-China-ahead-of-government-targets2

[6] https://www.ibisworld.com/china/industry-trends/fastest-growing-industries/