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Navigating the Regulatory Storm: Chinese Companies Opt for Hong Kong IPOs

Daniel Kim Views  

Reuters·Yonhap News

Many companies choose to go public in Hong Kong as a solution to the inactive Chinese stock market, as authorities tighten regulations and raise the Initial Public Offering (IPO) threshold.

Expectations are rising that the stagnant Hong Kong IPO market will recover, but experts are cautious, fearing the flock of less competitive companies to the Hong Kong stock market.

21st Century Economy Network, a Chinese media outlet, recently reported, “As the IPO fever in the Chinese stock market has calmed and the threshold for listing has risen, more mainland companies are seeking to enter the Hong Kong stock market.”

As of April 26, 94 companies have chosen the Hong Kong IPO. This includes star companies such as autonomous driving solution company Deeping Xian (Horizon Robotics), China’s largest bubble tea brand, MIXUE Bingcheng, Mao Geping, targeting the number one spot for Chinese cosmetics brands listed on the Hong Kong stock market, and unrivaled Xing Pai in the medical industry.

In particular, Horizon Robotics is expected to raise $500 million, making it the largest IPO in Hong Kong this year. This far surpasses the $330 million raised by Cha Bai Dao, which attracted the most considerable amount of money among successful IPO companies in Hong Kong this year. Horizon Robotics is currently valued at around $8.7 billion.

As the Hong Kong stock market has remained sluggish as much as the Chinese stock market, the Hong Kong IPO market has remained in recession for some time. According to global accounting and consulting firm Deloitte, only 12 companies were newly listed on the Hong Kong stock market in the first quarter of this year, raising a mere 4.7 billion Hong Kong dollars. This is the lowest level in 15 years, since the first quarter of 2009.

The IPO market in Hong Kong has turned around since last month. In just a month, Cha Bai Dao, China’s first-generation AI company Mobvoi, and private construction company Tianjin Construction Power all succeeded in IPOs, attracting nearly two-thirds of the first quarter’s total, which was 3.042 billion Hong Kong dollars.

Analysts say that Chinese companies choose to list on the Hong Kong stock market rather than the mainland due to the tightening of various regulations and the increase in listing thresholds by the authorities, who are calling for ‘investor protection’ amid the continued stock market slump.

On the 30th of last month, the Shanghai Stock Exchange also announced the ‘Tentative Regulations on the Issuance and Listing of ChiNext (China’s version of NASDAQ) Companies’ under the guidance of the China Securities Regulatory Commission. According to this, companies hoping to become president of ChiNext must meet conditions such as a cumulative R&D investment of more than 80 million yuan over three years and more than seven patents related to their primary business. 

An industry insider in China analyzed, “In practice, this effectively encourages companies to develop feasible patents, eliminating companies with relatively weak profit potential from IPOs and protecting the interests of investors.”

Therefore, despite signs of recovery in the Hong Kong IPO market, experts are more cautious. This is due to concerns that relatively poor companies could list on the Hong Kong stock market. Zhang Kexing, director of Beijing Gray Asset Management, said, “Some less competitive companies may be listed because the recent performance of Hong Kong stocks has not been good. We will not buy Hong Kong stocks for the time being. However, if the performance continues to improve, the return on newly listed stocks will also improve.”

Daniel Kim
content@viewusglobal.com

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