This is the last in a series of four articles analysing the Hong Kong and mainland stock markets, delving into the reforms, emergence of the Star Market as a solid fundraising venue, upcoming technology champions and the way forward. You can read Part one here, Part two here and Part three here.
If Nasdaq looks in its rear-view mirror, it will see Hong Kong and Shanghai are speeding up behind. Could either become the world’s next top tech fundraising centre – where the next generation of Facebook, Apple, Amazon, Netflix and Google would choose to gather to access the capital and synergy they need?
“There’s a real battle going on,” Jefferies chief global equity strategist Sean Darby said of the race between Hong Kong and Shanghai to become at minimum the Nasdaq of Asia.
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“For financial centres, the ability to attract the [initial public offerings ] or secondary listings brings on so many other economic and financial multipliers … the IPOs in a sense are such a big, flashy gun spark for the whole financial services industry to accelerate,” Darby said.
Nasdaq would be hard to catch up to, having dominated the world’s tech public fundraising since its founding nearly five decades ago. Yep, it’s nearing its big 5-0 birthday, underscoring what an amazing ride it has been on.
The Nasdaq has many advantages over Asian wannabes that include Japan’s Jasdaq, Korea’s Kosdaq, as well as Hong Kong’s new Hang Seng Tech Index and mainland China’s Star Market and ChiNext boards.
These advantages include America’s appeal to global investors and flexible listing rules, the Silicon Valley network, and acclaimed universities, such as tech breeding grounds Stanford University and Harvard University, attended by the likes of Bill Gates of Microsoft, Mark Zuckerberg of Facebook and Google co-founders Larry Page and Sergey Brin. Plus, unlike mainland China, the US has open markets where foreigners can easily list as well as a convertible currency.
Just the prestige of listing on the Nasdaq is in itself incomparable. These add up to an edge that explains why 67 Chinese tech star companies chose to list there, from e-commerce giants Alibaba, JD.com and Pinduoduo to online games goliath NetEase.
Nasdaq greatly exceeds its Asian peers in terms of IPOs. Its debuting companies raked in US$25.8 billion so far this year, compared with Shanghai’s hot one-year-old Star Market, at US$17.9 billion. Hong Kong’s IPOs totalled US$19 billion, according to data from Refinitiv, though that figure includes non-tech companies.
Other Asia countries have fired up their tech engines and tried – but failed – to speed past Nasdaq.
Tokyo launched the Jasdaq in 1991. Seoul set up the Kosdaq in 1996. Despite being modelled after the Nasdaq, the two bourses remain listing venues for small and mid-cap domestic companies, as larger tech giants such as Samsung Electronics and LG Electronics skipped them to list on the main boards.
Companies that went public on the Jasdaq raised just a combined total of US$86.5 million so far this year, while peers on Kosdaq netted US$726 million, according to Refinitiv.
Meanwhile, Singapore’s stock exchange announced earlier this month that it will deepen its partnership with Nasdaq for companies to seek secondary listings in the city-state. Even Macau, the Las Vegas of Asia on steroids, has looked into the possibility of setting up an offshore, yuan-denominated securities exchange that imitates the Nasdaq.
But the announcement by Ant Group that it will jointly list in Hong Kong and Shanghai – in what may be the world’s largest IPO in history – may later be looked at as a turning point in the race to end Nasdaq’s dominance. While neither city may ever surpass Nasdaq in terms of attracting foreign listings, by the looks of it, they are in a two-car race to become Asia’s Nasdaq.
“Tech companies in Asia have gotten much bigger, and as they reach certain size, they need additional external financing,” said Michael Wu, an analyst focusing on stock exchanges at Morningstar. “And stock exchanges obviously see this as an opportunity as tech companies want to list.”
Hong Kong recently launched its first tech board of 30 top companies, dominated by Alibaba, Tencent, Meituan Dianping – dubbed the ATMs – plus Xiaomi and Sunny Optical, all Chinese giants that span fintech and e-commerce to social media and smartphones.
In addition to getting a chunk of Ant Group’s dual listing, which could end up as the largest ever in the world, Hong Kong is expected to continue to attract secondary listings by US-listed Chinese companies. In the past year alone, Alibaba, JD.com and NetEase have had successful secondary listings, and they are expected to attract additional shareholder interest when they become available to mainland traders through the Stock Connect trading link.
Just how high Hong Kong can fly as an IPO destination for growth companies will depend on a clutch of factors, ranging from a continuation of listing rule reforms to a steady rise in trading liquidity, according to investors and analysts.
The Ant Group listing could be a much-needed opportunity for Hong Kong to reinforce its status as a connector of the East and the West – which are growing increasingly apart – and offset some of the doubts over the city’s future over political uncertainties following the introduction of the National Security Law.
China is enticing more of its innovative tech stocks to list at home. But Hong Kong’s tech board has an edge in the Nasdaq wannabe race because China’s capital markets are largely closed off from the rest of the world, and foreign companies are not yet allowed to list there.
While it is true almost all non-local companies listed in Hong Kong are based in mainland China, it has the potential to extend its prowess over tech listings not just from China but elsewhere in the world, according to Jefferies’ Darby. For example, Singaporean gaming hardware maker Razer went public in Hong Kong in 2017, raising HK$4.12 billion (US$528 million) in one of the largest tech listings that year.
Many international firms have tech manufacturing bases and research and development centres in China, and they could be interested in doing spin-offs to raise funds in Hong Kong, Darby said.
Meanwhile, if the US eventually passes a bill to bar Chinese companies from listing in New York over blocked access to their audit working papers, other foreign companies that have American depository receipts could also feel the pressure to leave.
The Nasdaq 100 Index, tracking the largest companies listed on the board, has skyrocketed by 760 per cent since 1998, when the exchange launched a series of campaigns featuring companies like Apple and Intel, to promote “the stock market for the next 100 years” under the shadow of the “Big Board” run by New York Stock Exchange.
Behind the growth was a magnificent rise of companies in industries such as social media, online entertainment, e-commerce and semiconductor globally. Now, many of the member companies of the Nasdaq 100 index have grown into some of the most valuable companies on the planet, such as Apple, Microsoft and Amazon.
To replicate Nasdaq’s success, Hong Kong needs to continue evolving and reforming, according to analysts.
“Hong Kong has made large strides forward in terms of making its exchange more attractive to tech companies, as evidenced by the listings of the likes of Alibaba, JD.com and NetEase,” said Alexandra Bidlake, corporate partner at law firm Linklaters in Hong Kong. “It seems likely though that Hong Kong will constantly need to evolve and adapt to ensure it remains competitive with other Chinese and regional exchanges as well as Nasdaq and other overseas exchanges.”
A key unresolved question over the listing of Ant Group – as well as potential future listings of Chinese new economy companies – is whether their corporate shareholders will be allowed to own shares that carry more voting rights than others, according to Bruce Pang, head of macro and strategy research at China Renaissance.
This is known as the weighted voting rights (WVR) with corporate shareholder structure. At least 38 US-listed Chinese tech giants such as Tencent Music adopt such structure, according to the Hong Kong Exchanges and Clearing. This is currently not allowed in Hong Kong or China but permitted in the US and Singapore.
The HKEX in May ended a public consultation on a proposal to allow such structure, which would expand its listing reform in April 2018 that allowed the listing of companies whose founders or key managers held shares with greater voting rights.
“Hong Kong has a competitive edge in that it has already attracted more WVR-structured companies compared to the Star Market,” said Pang. “If Hong Kong reforms to expand the WVR structure to corporate shareholders, that would make it even more competitive.”
In addition, whether liquidity from global and local investors will continue to rise steadily is another key factor in determining the future of tech listings in Hong Kong.
“Publicity, liquidity, valuation and performance will continue to play a big part in attracting more tech issuers and investors,” said Ivy Wong, law firm Baker McKenzie's Asia-Pacific chair for capital markets practise.
While the main board of Hong Kong has been years criticised for its thin trading volume especially during a down market, there are reasons to be hopeful that a recent surge in turnover will extend into a long-term trend, according to William Yuen, portfolio manager at American asset manager Invesco.
Unlike China, Hong Kong allows capital to flow freely in and out of the city with its currency freely convertible. This makes it set to benefit from the historic monetary easing by major central banks launched to protect the global financial system from the shock of the Covid-19 pandemic.
“The global liquidity will always search for growth potential. When the time is right and the global investors want to invest more heavily into these growth sectors, the liquidity will naturally flow into Hong Kong,” he said.
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This article Every major Asian market has a Nasdaq-wannabe. Can Hong Kong or Shanghai tech boards close the gap? first appeared on South China Morning Post