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Despite this year’s slowdown in H-share listings, the market anticipates a rapid return to form.mini storage Emma Dai reports. On the last day of September, Livzon Pharmaceutical Group, one of the top-50 drugmakers in China, announced it had been given the go-ahead by the China Securities Regulatory Commission (CSRC), on its application to transfer 111,993,354 domestically traded shares to the main board of the Hong Kong Stock Exchange (HKEx). “The company’s Hong Kong listing plan is still pending hearings by the Listing Committee of HKEx,” said the statement. “It’s not assured that the listing application will get approval.” Even so, the local market, urgently in need of stimulus, welcomed the move. “There is a great chance that we will see Livzon’s Hong Kong listing in the fourth quarter,” said Edward Au, co-leader of the national public offering group at Deloitte. H-shares, this year marking their 20th anniversary, launched in 1993 with the debut of Tsingtao Brewery. Today, 151 mainland companies are listed on the main board, with a market capitalization of HK$4.41 trillion ($568.9 billion). This year however, the market has been somewhat lackluster. There have been only two new H-share listings — Sinopec Engineering and China Galaxy Securities. Last year saw nine new listings. The biggest year of all, 2006, saw 19 mainland companies enlist. Game changer A large proportion of the big state-owned enterprises (SOEs) already have come to Hong Kong, giving rise to concern new listings for H-shares may run out of steam. There are disagreements. Some argue the game is about to change. “In the forthcoming years, there will be fewer big names, but more small- and medium-sized private enterprises (SMEs) will list in H-shares,” said Au. The expectation is founded on pretty solid ground. In the past, CSRC, China’s regulatory body which approves all offshore listing applications, has exercised tight control over those offshore listings and set onerous qualifications. Until earlier this year, any mainland company seeking an overseas listing was required to have net assets of no less than 400 million yuan ($65.5 million), and net profit of no less than 60 million yuan for its most recent year. Its fundraising expectations were required to be not less than $50 million, based upon reasonable expectation of a favorable price/earnings ratio. A new guideline, effective last Jan 1, however, removes those quantitative thresholds and simplifies the application procedure. “The previous rules favored large companies, especially the ones that were state-owned,” said Au. “But as CSRC loosens its grip on overseas IPO applications, H-shares no longer are the exclusive playground of the big names. Smaller companies, which spend money at a prodigious rate and are thirsty for capital, are now able to avail the Hong Kong market, as long as they fulfill the demands of local authorities.” Conditions on the mainland’s domestic market are another driving force steering mainland companies toward Hong Kong, especially SMEs. “There are a large number of companies waiting in the pipeline for A-share listing (on the mainland) right now,” said Au. “Yet there still is no timetable for CSRC to resume IPOs. The uncertainty in A-shares makes listing in Hong Kong a good choice for mainland companies.” Since the end of September 2012, not a single A-share stock has been listed, making this the longest suspension of IPOs in the history of the mainland’s stock market. But no matter how sluggish the market sentiment, companies’ determination to attract more cash remains unabated. According to CSRC data, up to Sept 26, 748 companies were waiting to list in A-shares. Of those, 176 were considering listing on the Shanghai stock exchange, 308 on the Shenzhen main board and small and medium enterprise board. The Shenzhen growth enterprises market has 264 applications. An additional 274 IPO applications have been terminated this year. Wait in line Some companies stuck in the queue already are looking south toward Hong Kong. Apart from Livzon, reports have named a handful of mainland companies seeking listings in Hong Kong. On Wednesday, China Everbright Bank announced it had won approval from the CSRC to issue 12 billion H-shares, with a face value of 1 yuan per share. This is the third time the bank has tried to list in Hong Kong. The previous two, in 2011 and 2012, were abolished because of a deterioration in market conditions. In September, CSRC disclosed that the A-share listing application for the Bank of Chongqing on the mainland had been suspended. Reports said the municipal bank, based in Southwest China’s economic power house hopes to pocket HK$6 billion to HK$7 billion in Hong Kong. A road show is said to be planned anytime now. If it goes ahead, Bank of Chongqing will join its country fellow Chongqing Rural Commercial Bank, the first, and so far only mainland municipal bank listed in the city. Meanwhile, Huishang Bank, another municipal bank based in Anhui province, is reportedly re迷你倉dying its plan for a Hong Kong IPO in November. The application is already in the hands of local regulators. The bank hopes to raise HK$11.7 billion. The list of potential issuers is long. Other mainland companies applying for Hong Kong listing include two Fujian-based menswear makers — Fuguiniao and N&Q; Bank of Shanghai, another municipal bank abandoning listing on its home turf; Shenzhen-based property developer Vanke and Tiandi Yihao Beverage, a Jiangmen-based fruit vinegar drink producer. “We estimate that the H-share IPO market will maintain the same rate this year as last year, roughly,” Au said. “By year’s end, there could be up to six listings to come — depending on the market conditions. But there will be at least four more IPOs.” “People expected a rush of H-share listing when CSRC changed the rules at the end of last year,” he added. “However, potential issuers were suspicious about the policy. In March, some local branches of CSRC had to hold workshops introducing H-share listing procedures. Not until then, did people start to believe there was a shift in attitude of the authority and realize that it was practical for SMEs to apply. But it takes time to prepare the documents. June and September are traditional windows for IPOs, which follow the financial information updates as required by the authorities. Those were missed this year because the market turned volatile as a result of soft China economic data and the expectation that the US will withdraw quantitative easing. But as people relinquish their former wait-and-see attitude, we hope to see an explosive increase of H-share IPOs next year.” Fully-circulated stock One move that will help to energize the market came in July. Fuguiniao, the menswear brand and shoemaker, is reported to have received preliminary approval from CSRC for its listing in Hong Kong and subsequently to have filed an application to the HKEx. The first hearing before the HKEx Listing Committee is expected as early as this month. All eyes are scrutinizing the procedure, because it marks the first time a Chinese private enterprise has applied to list as a fully-circulated stock on the local bourse. Apart from China Construction Bank, current H-share listed stocks are not fully-circulated. As required by local authorities, the lower limit of tradable shares, or float, the shares held by the public, is 25 percent of the capital stock. The remaining 75 percent, known as founder’s stock and domestic shares, are not tradable on the public market and are held by various authorities. CSRC hasn’t published any official instruction on how to issue a full-circulated stock. “That is not a problem for SOEs because the country doesn’t need to underweight its stock,” said Au. “However full-circulation is a more flexible way for private-enterprise owners. They may need to sell the shares and cash in one day. Being unable to list the company as fully-circulated is a concern.” Besides, a limited size of float affects the efficiency of fund raising. “In Hong Kong, listed companies usually acquire shareholders’ mandate on their annual meeting. That empowers the management to issue new stocks, up to 20 percent of the circulation, without further permission from shareholders,” said Au. “It’s a convenient way to fund activities such as mergers and acquisitions. However, if the stock is only 25 percent circulated, the benefit will be largely discounted and listing becomes much less attractive.” The authorities’ decision on the Fuguiniao case is expected in the fourth quarter. “If approved, the IPO will be a shot in the arm to the market,” said Edmond Chan, PwC capital market services group partner. “With that precedent, all private enterprises seeking listing in Hong Kong will follow suit. Along with better market sentiment, we may see up to 20 H-share IPOs next year.” In a blog posted on Sept 2, Charles Li, chief executive of HKEx, expressed his optimism about the perspective of H-share listings. “A more significant growth will come from the floating of more shares of existing H-share companies,” he said, adding H-shares held by government authorities are worth trillions. “We expect them to be released gradually. When that happens, it will significantly uplift the size and liquidity of our market.” Currently the market capitalization of the Hong Kong stock market is about HK$22 trillion, the sixth-largest in the world. If all the existing H-shares are converted, the market value will grow 55 percent, to about HK$35 trillion, Au says. “Hong Kong would then be more attractive to institutional investors, who change portfolios frequently and prefer high-liquid markets.” Contact the writer at emmadai@chinadailyhk.com A more significant growth will come from the floating of more shares of existing H-share companies.” Charles Li chief executive, HKEx In the forthcoming years, there will be fewer big names, but more small- and medium-sized private enterprises (SMEs) will list in H-shares.” edward Au co-leader, deloitte 文件倉