New HKEx rules may pull in China’s tech giants

Industry Comment

If the regulator allows the weighted voting rights structure, it will tilt Hong Kong’s stock market toward tech stocks, bringing higher valuations but also increased volatility, argues Tobias Bland, CEO of Enhanced Investment Products.

The weighted voting rights structure (or dual share class listings), a proposed change to the Hong Kong Stock Market that was announced in December 2017, is intended to attract established public companies listed in the US such as Alibaba as well as tech companies considering an IPO such as China’s Xiaomi, according to Bland.

“China is feeling very nationalistic about the fact that the whole internet sector is listing in America,” Bland told FSA. “They’ve asked the [Hong Kong] exchange to think about waiving the equal voting rights rule.”

Key mainland companies, including internet giants such as Alibaba, Baidu and JD.com, rejected a Hong Kong listing and instead chose the US. The US markets allow the dual class share structure, which is important to the founders because it keeps them in control of the company.

If the new rules are adopted, “Baidu, JD, Alibaba will definitely be making announcements to have listings over here,” Bland said. “It’s very logical.”

Allowing such listings in Hong Kong might attract another Chinese tech giant, Xiaomi, which is planning an IPO later this year and weighing the pros and cons of a New York listing versus one in Hong Kong.

“Investment bankers are saying you should list in New York because that’s where the capital is and you’re going to have a superior trading volume,” Bland said. “We don’t agree with that.”

Tech brings volatility

If the new rules are implemented, the Hong Kong market will likely attract many technology companies from China, which would tilt the territory’s stock market toward that sector, Bland noted.

But technology stocks tend to be more volatile than average, he added. The higher volatility would be reflected in the performance of Hong Kong equity indices and index tracking products linked to them.

EIP manages the Hong Kong-domiciled and listed XIE Shares FTSE Chimerica ETF, which invests in US-listed Chinese companies, or “N shares”. A local listing of the constituents would be beneficial for the product, Bland said. It would enable real-time arbitrage, increasing the ETF’s trading volume and liquidity.

Chinese companies listed in the US tend to trade at the price-to-earnings ratio of around 29, according to Bland. Compare that to domestic US tech companies trading on average at 36 times earnings.

“International investors perceive a greater risk to Chinese companies and valuation is therefore lower,” Bland said. “If they list in Hong Kong, then Chinese investors should be able to access them through Stock Connect in the future.”

Chinese domestic tech stocks, and those listed in Hong Kong such as Tencent have high valuations, he added. If Alibaba, Baidu and JD.com do list in Hong Kong, then demand from Chinese investors will likely boost their valuations to levels higher even than those of US tech stocks, Bland said.

The high valuations would be justified by the companies’ strong earnings growth thanks to China’s high mobile penetration, booming e-commerce, favourable demographics and restrictions favouring domestic internet companies.

The proposed rule change is also likely to attract to Hong Kong technology companies not based in China. “They believe the valuations they would see in Hong Kong would probably be greater that in their home markets,” Bland said.

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