Insight & Analysis

HK set to benefit from IPO clampdown

Published: Jul 2021

Tighter rules from Chinese regulators on mainland companies listing overseas has dampened enthusiasm for initial public offerings (IPOs) in markets like the United States. Hong Kong, however, looks set to benefit from the new regulatory regime as a location of choice for IPOs.

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When the ride-hailing app Didi raised US$4.4bn on the New York Stock Exchange at the end of June, it pointed to the benefits of Chinese companies listing overseas, and the buoyant market for initial public offerings.

That mood soon soured, however, when two days later when China’s cybersecurity regulator took action that forced the company to remove its app from app stores. Although existing users can still use the app, being unable to acquire new customers hardly inspires confidence among investors. It has also dampened the enthusiasm for other Chinese companies seeking to list - for fear of the implications of regulatory action they may also be subjected to.

The Cybersecurity Administration of China took issue with Didi’s use of data, as it becomes increasingly concerned with national information security and how data is managed across borders by companies that are listed in foreign countries. Since the move to restrict Didi, regulators said they were also investigating recruitment app Boss Zhipin and freight platform Full Truck Alliance, which are also listed in the United States.

The move has forced a number of Chinese companies to rethink their overseas IPO plans, with reports of at least five companies - Ximalaya, LinkDoc Technology, Soulgate, Hello and Keep - abandoning their overseas listing. According to data from Refinitiv, there are an additional 17 Chinese companies that had plans to list in the United States this year.

The action by the cybersecurity regulator forms part of a broader move by Beijing to tighten the rules on companies listing overseas. As well as protecting sensitive data and boosting cybersecurity, further rules are expected. “Recently, various regulatory agencies in China have also begun to scrutinise companies in internet and technology-related sectors on a range of issues, including but not limited to data security, consumer privacy, anti-competitive practices and merger irregularities,” a recent research report by China Renaissance stated.

For Chinese companies considering an IPO in the United States, notes the China Renaissance report, they will have to wait for clarification and may be subject to scrutiny and pre-approval from a number of Chinese regulatory agencies. “The new rules may impose long waiting periods on companies hoping to list abroad. We expect this will dampen investor sentiment, potentially depress valuations for IPOs in the US and make it more difficult for Chinese companies to raise funds overseas. After any clarification of the rules, eligible Chinese companies should still be able to be listed in the US, in our opinion. Yet, the landscape for Chinese equities as well as China’s regulatory framework could undergo dramatic change,” the report from the research team at China Renaissance stated.

Given this, it is likely that Hong Kong will stand to benefit and the report notes that the international financial centre is becoming better equipped for such challenges: “We find the Hong Kong market is becoming a more attractive listing destination for Chinese companies, a major venue for Chinese ADRs’ [American depositary receipts] homecoming, an international bourse with higher mainland participation, and a top-heavy and ‘polarised’ market providing diversified investment products.”

Hong Kong has introduced a number of measures that will improve its standing as an IPO location of choice. These include easing requirements for dual primary and secondary listings; increasing the southbound participation in Stock Connect; securing quality listed companies by raising the profit requirement for a main board listing; shortening the IPO settlement cycle, and launching Wealth Management Connect. “We expect more tech-focused and growth stocks to be listed in Hong Kong on rising liquidity and investor interest,” the report also notes.

The ‘Regulatory storm: Opportunities and disruptions’, which was published by China Renaissance last week, also notes that some sectors will be affected more than others when it comes to tighter rules for overseas listed companies. It states that healthcare, consumer industries - particularly food and beverage, and apparel - and industrials such as semiconductors and advanced manufacturing, as well as software and services are the least impacted sectors.

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