HKEX dual-class share reform to attract unicorn IPOs
Afraid of losing initial public offerings (IPO) by technology giants like Alibaba, the Hong Kong Stock Exchange is set to allow dual-class shares to list on the mainboard, trying to lure mainland unicorns or private startups with a valuation of over US$1 billion back to the city.
More unicorns’ listings to boost HKEX
“It is beneficial for Hong Kong Stock Exchange if more China-based unicorns are going to lead flotation in Hong Kong. These unicorns will help Hong Kong Stock Exchange raise more capitals and the trading volume will surge under such circumstance,” said Francis Sze-Chi Kwok, the managing director of Freeman Securities. Kwok added that the time for change had come, and the Hong Kong Stock Exchange needed to strive for a new era.
The move that allows a group of shareholders with bigger voting rights intends to advance the Hong Kong Stock Exchange in the financial world to compete with the New York Stock Exchange, which took over Hong Kong as the world's biggest IPO market last year. Some Financial analysts also believe that the current “one share one vote” system has outdated.
HKEX filed consultation documents in February, detailing dual-share companies’ listing and loosening rules for non-revenue biotech companies. It is expected the conclusion of the consultation will turn out at the end of April.
“Unicorn companies are eyeing for the implementation of the dual-share class structure since it can guarantee the control of founders over major decisions," said Darwin Choi, an assistant professor in the finance division of the Chinese University of Hong Kong.
Non-transparent mainland unicorns
Mainland companies vary a lot from Hong Kong companies due to different corporate culture and finance systems. “Mainland companies may not be as transparent as Hong Kong firms. The auditing systems and accounting standards are also different,” said Choi.
According to Bloomberg, Chinese smartphone maker, Xiaomi has already appointed Morgan Stanley and Goldman Sachs to lead its share flotation. It is still unclear whether New York or Hong Kong will be the final destination for the IPO, however, it is highly possible that Hong Kong would be chosen as the city plans to implement the dual-share class structures in the mid of 2018.
Investment risks do exist in these mainland unicorns if the valuation of their IPOs is too high. Kwok said that investors would suffer losses once the frenzy fades away. “If Xiaomi is going to seek a floatation in Hong Kong, the initial share price is crucial. The peak of the share price will be close if the initial price is set too high,” said Kwok.
Regulations needed for new listing rules
Hong Kong stock regulator The Securities and Futures Commission rejected Alibaba’s floatation in 2014 and said it contravened “one share, one vote” system with a dual share classes structure. The founders and big shareholders can cement control of the company since their shares contain bigger voting rights than other shareholders. The U.S. has adopted dual-class share structure for a long time and the class action provides a group of shareholders, usually, the management of the company, protection against the pressure of investors seeking for short-term return.
“It is a big issue for Hong Kong to work out the system that could protect small shareholders’ interests as well," said Christopher Cheung Wah-fung, the legislator of the financial industry. “We need to be careful if we are going to adopt the US class action system since the situation in the U.S. and Hong Kong is quite different. The risk should be highlighted once the action is applied, which may lead to big changes in Hong Kong society.”
《The Young Financial Post 新報人財經》