A massive listing emigration is expected to boost HK stock market Funds raised from share offerings in US and HK (in USD bn).
When Alibaba was listed on the NYSE on September 19, 2014, this was the only possible way to open itself to a broad investor audience. At that time the company was unable to meet the high corporate governance standards in Hong Kong. This as Alibaba has adopted a so-called weighting voting rights (WVR) structure, which is common in the tech industry, where shares held by the founder enjoy a higher voting right. Depending on the counting method, there are 200-250 companies which have followed the example of Alibaba. Together, these companies have a market capitalization of USD 1.1tn, with the top 10 companies accounting for 80% of this.
A good five years later, on 26 November 2019, Alibaba had 2.7% of its share capital listed in Hong Kong as a secondary listing. The reasons for this move were to gain access to Chinese as well as Asian-based investors, and certainly also certain efforts by the Chinese government to “bring home” leading Chinese companies. However, this step was also only made possible by reforms to the listing rules in Hong Kong.
The recently announced measures by the US government with regards to the “Holding Foreign Companies Accountable Act,“ which are intended to cut off Chinese companies from American investors will probably lead to more companies following Alibaba’s example. In June 2020, NetEase and JD.com have already completed a dual listing in Hong Kong.
All those companies that would not open their books to US regulators would have to be “delisted” in the USA no later than 3 years after the law came into force. However, only 11% of the companies listed on NYSE and NASDAQ are eligible for a secondary listing in Hong Kong.
They have to exceed (1) the HKD 40 (USD 5.1) billion market capitalization limit or (2) the combination of HKD 10 billion market capitalization and HKD 1 billion turnover. However, market participants expect these criteria, as well as those for listings in mainland China, to be further adjusted.
A look at the development of the trading volume at Alibaba, shows that the trading volume in HK does not match yet the trading volumes in the US: it only reaches a good 17% of the value on the NYSE. However, we expect this to increase over the coming months. For this to happen, the following catalysts would have to be met:
- First, inclusion of these stocks in the Hang Seng index, resulting in inflows from passive instruments.
- Secondly, secondary listings would have to be approved for the Southbound Stock Connect. This would allow mainland Chinese investors to buy the stock in Hong Kong. This potential volume is a multiple of the index admission.
- Thirdly, the Hong Kong Stock Exchange would have to reduce fees and the HK government would have to reduce transaction taxes in order to increase the trading volumes of high frequency traders from the NYSE. These account for more than 60% of the trading volume in the US and thus ensure liquidity.
In view of the rapidly developing geopolitical situation, we consider positions in the Hong Kong listings to be a safeguard for long-term participation in the success of these companies. However, the liquidity of the securities must be in relation to investor’s position size to guarantee the necessary liquidity.
Overall, we believe the trend for secondary listings in Hong Kong by Chinese companies that are solely listed in the US, which has been gaining pace, will continue for the next few years. Alibaba has generated a trading volume of USD 591mn in Hong Kong, and this compares to USD 946mn of Tencent and USD 3.7bn in the US. The potential for trading volumes in HK to increase further is large.
Roger Merz, Head of mtx Portfolio Management