Didi’s July cybersecurity probe sent shockwaves throughout the investment community, immediately instigating questions about future capital-raising options for Chinese companies, especially tech groups. While the months ahead will unveil what implications this, or any, cybersecurity review will entail, markets have already pointed to an immediate winner: Hong Kong.
The Hong Kong Exchange and Clearing’s (HKEX) share price has outperformed regional bourses amid implicit expectations that those who had planned a New York listing would now select Hong Kong.
The HKEX’s share price received a second dose of good news after the Cyberspace Administration of China (CAC) said it would exempt Hong Kong from first seeking approval from the cyber-security regulator, explicitly removing the need to source funding outside of the Greater China region.
Technology’s luster remains dull
Taken together, CAC’s Didi probe and Hong Kong’s approval exemption sets precedents for any future Chinese deals, especially ones that house user data. While Hong Kong may become more attractive for many startups, a warm welcome is not necessarily guaranteed in the current environment.
Share price performance across sectors best demonstrates this point. While the market value for the HKEX has risen by a quarter year to date, the Hang Seng Tech Index has lost a tenth of its value.
An uncertain regulatory environment weighs over the sector as Beijing continues to strengthen its grip over influential domestic tech champs. However, improving relations between policymakers and tech groups follow a series of high-profile meetings and subsequent company penalties, suggesting that the tensions may have already peaked.
Alibaba’s April antitrust fine represented only 4% of its revenue, well below the maximum 10% limit. In July 2021, the e-commerce group was also granted approval to increase its stake in Suning, a brick-and-mortar store operator to build out Alibaba’s physical touchpoints and improve its strategic retail competitiveness.
Even if Beijing is moderating its view, a softening tone does little to help companies that choose Hong Kong. In addition to deeper liquidity and more favorable enterprise valuations, going public in New York is comparatively easier than in Hong Kong where applicants are reviewed by both the stock exchange and securities regulator.
The vetting process is also becoming tougher. Starting next year, the HKEX will increase its profit requirements for the mainboard, representing the first change in almost thirty-years. Under the new rule, applicants must achieve a minimum aggregate profit threshold of HKD$80 million in its third financial year, representing a 60% increase from the earlier prerequisite. New York requires a lower market capital valuation or adjusted pre-tax profit.
Listing Gap
Beijing channeling more deals into Hong Kong allows the exchange to be more selective, generating a stronger applicant pool for the mainboard. This matches HKEX’s long-term vision to lift the quality of the bourse by further strengthening the city’s role as Asia’s premier international financial centre, according to Bonnie Chan, HKEX’s head of listing, in a press release.
But the different qualification standards create a listing time gap for those going public as many Chinese companies that would have been eligible for New York earlier, now face new Hong Kong standards.
The tougher criteria should buttress investor sentiment, as noticeable green shoots surface. Chinese technology stocks seem to perform better in Hong Kong than New York because of the more rigorous regulatory clampdown, according to Mike Suen, partner at Withers. The HSI Tech Index’s disappointing performance still outperformed the Nasdaq Golden Dragon China Index, an index of US-listed Chinese companies, which has lost about a fifth of its value this year.
Though more arduous than New York, Hong Kong offers lower tax and capital market infrastructure with more international investors when compared to mainland bourses. But even for companies that meet the higher profit thresholds, the rush to raise a public offering in Hong Kong seems unlikely now.
While new Chinese deals are imminent, investors and companies are closely monitoring the impact from the latest cybersecurity clampdown. Many startups want to list, but few will want to go first.
