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| Kwan: China factor with favour Hong Kong | |
In its strategic plan 2007-2009, the Hong Kong Exchanges and Clearing Limited (HKEx) has stated that, “the listing facility will be expanded to include more overseas jurisdictions and will be promoted in select markets in order to develop an Asian focus”. The facility that the exchange seeks to expand is by way of depositary receipts (DR). Starting from July 1, overseas firms are allowed to list Hong Kong depositary receipts (HDRs), making Hong Kong the fifth DR market in Asia after Japan, Singapore, Korea and India.
HKEx unveiled details of HDR on May 9 after a year of consultation. HDR will be similar to American depositary receipts (ADR) traded in the US. Overseas companies wanting to issue HDR need to appoint a custodian to hold shares as security for the HDR, which will then trade in Hong Kong like other listed shares. HDR candidates must follow the same rules as for the main board and must have a minimum 25% public float and a combined profit of HK$50 million (US$7.7 million) in the three years before listing.
HDR initially will not be allowed to list on the Growth Enterprise Market (GEM) but the HKEx will consider GEM listings in the future.
HKEx is the second largest bourse in Asia with a market capitalization of US$2.6 trillion at the end of 2007. The large market capitalization, mainly generated by mega initial public offerings (IPOs) from mainland China in the last three years, will have to look at new sources to sustain itself. The total IPO funds raised in 2007 slid to HK$295 billion from HK$342.2 billion in 2006, and the sum is expected to go down further in 2008.
With this in mind, HKEx, jointly with the government, has started actively promoting Hong Kong as a listing venue for overseas issuers since two years. For companies from jurisdictions that restrict movement of shares abroad or prohibit an overseas register or splitting of the register, the DR regime provides the solution.
Depositary banks such as Citi and JPMorgan have been having regular dialogues with HKEx on the new regime
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| Tse: Professional boards will not entail substantial investment |
for over one year and they have started reaching out to potential issuers. Siu-chan Kwan, Asia Pacific depositary receipt services’ regional sales director of Citi, expects that interest will emanate mostly from global emerging markets, whose capital market is yet to become mature. As these emerging markets achieve speedy economic growth, but their domestic market is unable to keep up with the capital demand of the issuers, they will seek to list overseas.
But the clients are not only limited to emerging markets, according to Kwan. The DR regime will open a door for issuers in developed markets to increase their profile with a second listing. From this perspective, he says, issuers in the USA, Europe and the Middle East are all potential customers for the HKEx.
Shareholder protection
Industry wise, Kwan suggests that commodities and mining stocks may prefer Hong Kong because they are very capital intensive. He points out that mining shares in Hong Kong performed well last year, and their price to earnings ratio is become very attractive compared to those in other bourses.
Last June, HKEx announced a project to establish a DR framework in its listing rules. The governing principle of the DR project is that there will be no policy change. All the existing provisions for shareholder protection in the listing rules will apply to DR issuers, which means that any overseas issuer seeking a listing on HKEx will have to comply with the same regime, whether the issue comes in the form of DRs or ordinary shares.
According to HKEx, the amendments to the listing rules for inclusion of DRs will address, in particular, the two-tier legal structure of DRs, seeking to ensure that the holders of DRs enjoy equivalent rights and protection as holders of the underlying shares. This structure, as it is, is similar to ADR but different from global depositary receipt (GDR), because the latter is only open to institutional and accredited investors.
Singapore, which launched DRs last year, is another bourse in Asia that has taken measures to absorb new issuers aggressively. Its listing rule is less stringent, so that the exchange has been able to attract a larger number of issuers from southeast Asia. The market, being in a closer time zone with India, also appeals to issuers from the country, eg Tata Steel, the sixth largest steel company in the world, has already expressed interest in Singapore as a listing venue.
To the question of HDR’s competitiveness vis-a-vis GDR in Singapore, Kwan responds that the two markets are not in direct competition because their listing requirements are different and hence draw different issuer groups. A vast secondary market and high turnover rate will make HDR extremely well-placed to succeed in Asia, in terms of reaching the critical mass. Kwan believes, however, that it is the ‘China concept’ that will turn this Chinese SAR into a success story at the end of the day. For issuers who have a strategic China intent, HKEx’s large liquidity, provided by retail investors, adds value. Kenneth Tse, managing director, depositary receipts group at JPMorgan Asia-Pacific, avers that liquidity is HKEx’s major advantage. “HKEx has built a good reputation for robust infrastructure, handling high volumes and a credible regulatory environment.”
DR is only one of the few measures that HKEx is working on to raise its global competitiveness and to attract overseas issuers; the bourse is also studying to launch a “professional board”, with more flexible listing requirements. HKEx chief executive Paul Chow first announced at the annual general meeting last month that a consultation to introduce a professional board will commence by year-end. The professional board will only let institutional but not retail investors trade.
Tse expects that a professional board should not involve substantial additional investment because the infrastructure is already there. He supports the notion to start up another listing tier that is similar to 144A in the US, where only institutional investors and accredited investors are allowed to trade. “Now, it (the main board) is open to everyone and retail investors account for 30% of the trade, so the exchange has to have all the protective measures. Maybe, they can attract a broader range of issuers in that tier.” Tse says that HKEx has been evaluating the steps to make way for this new tier of professional board.
Expected yield
Mainland Chinese companies have been allowed to list in Hong Kong as red chips and H shares since the early 90s; after HDR is launched, will these companies forgo the listing means of H shares? Tse rules out the possibility, and says that H shares are already an established channel for Chinese companies to list in Hong Kong.
Kwan concurs, yet also thinks in jurisdictions that allow companies to register overseas, the issuers may still choose DR over ordinary shares. Firstly, DR has over 80 years of history and hence can boast of a very well established structure; secondly, DR has an advantage on trading volumes because they involve a conversion agency as intermediary.
Kwan alludes to Sinopec that is listed in ADR and Hong Kong as an example. When a trader delivers ordinary shares to the DR bank in the afternoon in Hong Kong time, the bank is able to issue DRs to the trader when New York starts trading that night in Hong Kong. Vice versa, when a DR holder passes the ADR to the bank when the NYSE opens, the ordinary shares will be in the investor’s hand when Hong Kong starts trading. However, in the case of ordinary shares, they first have to be de-registered in order to trade in a different market, and that takes around two to three days.
Most businesses do not succeed on debut. Tse believes it will take a few years for HDR to build up its critical mass. “When H-shares were launched 15 years ago, some people were not sure if it would have any future, but now it accounts for half of Hong Kong’s trading volume. The same is true for warrants. When it was first launched, there was limited trading, but now it is one-tenth of the total trading and the warrant market in Hong Kong is one of the largest in the world.”
