Hong Kong Listings Offer Ring-Fenced Route to China Valuation

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Hong Kong Listings Offer Ring-Fenced Route to China

During 2020, nine China-headquartered companies listed in the U.S. 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. 

The HKEX was the world’s second-largest IPO market last year, raising almost USD 51.3 billion (bn) compared to the USD 57.3 bn raised on the Nasdaq in first position.1 And the appeal of the exchange for foreign multinationals is set to grow following a March announcement that it would be seeking proposals to streamline its listing regime for overseas issuers. 

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

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, with a view to target China’s premium beer market. Fast Retailing, the business behind high street fashion brand Uniqlo, 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 the early 2000s, Western brands with experience in the sector 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, luxury brands such as 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.

However, we believe that there are many more multinationals that could benefit from an HKEX listing as a platform for expansion in China. The appeal of the Chinese market for international businesses remains undimmed. Consumer spending in what is already the world’s second biggest economy is set to double by 2030.2 China already ranks top in absolute terms for middle class consumption, and within six years, this segment will number around 1.2 billion people, a quarter of the world’s total.3

Yet, breaking into this market remains complicated, particularly amid simmering global geopolitical tension.

Against this backdrop, having a primary or secondary listing in Hong Kong can allow multinationals to raise money in China for use in China. There are significant amounts of capital available in Hong Kong from international institutional investors, Mainland Chinese investors, QDIIs and through the Shanghai-Hong Kong Stock Connect—with all of them looking for exposure to opportunities in 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 one of two ways. The first is to undertake a secondary listing on the HKEX. The second is to 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. 

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 stabilise, and in many countries, we will be back to where we were before the pandemic, that is, with growth in mature markets 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 the year jumped 22.3% from the same period last year to CNY 758.05 bn (USD 117.7 bn), according to China’s commerce ministry.4

Chinese policy 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 further opportunities not only in auto supply chains but also in related areas such as charging infrastructure.

Elsewhere, thanks to market reform, we see 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, based on data from research firm IbisWorld.6 The café, bar and drinking establishments sector, meanwhile, is expected to grow in revenue by almost 27% in the next year, close to the projected growth for department stores and shopping malls and not far off predictions for the hotel industry.

Currently, the pipeline for secondary listings in Hong Kong is dominated by Chinese businesses listed on U.S. stock exchanges. Western multinational corporations would do well to explore how a secondary listing or spinning off a separate China entity for an IPO in Hong Kong could provide them with the platform for growth in the world’s fastest-growing consumer market. Kroll has recently analysed the requirements on special purpose acquisition companies (SPACs) from the Singapore Exchange.7

And we at Kroll would be glad to assist you with that exploration. We are independent, free of conflicts and can offer the peace of mind of working with a global firm, aligned with Western standards, with a focus on valuation, governance, risk and transparency. We are also the largest valuation firm in the world, with expertise in the industrial, consumer, healthcare, financial services, real estate, energy and mining and telecommunications, media and technology sectors, to name a few. 

Coupled with this, we have significant experience in China and have been involved in large-scale projects in Hong Kong’s capital markets since the 1970s.

We can offer a one-stop-shop for all processes related to the HKEX listing, including asset and instrument valuations, transfer pricing, cyber security, due diligence and investigation, pre-list restructuring, and advice on environmental, social and corporate governance compliance.

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/
7. https://www.kroll.com/en/insights/publications/singapore-exchange-welcomes-spacs-boost-asia

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