Easing of mainland's listing rules may hit flotations in HK: Experts

The impending relaxation of listing rules on the mainland to help small- to medium-sized enterprises (SMEs) in the private sector raise capital can lead to the contraction of the lucrative IPO market in Hong Kong, bankers and analysts said.

An executive meeting of the State Council chaired by Premier Li Keqiang on Wednesday night urged regulators and the stock exchanges to "fight the clock" to introduce a registration-based system in processing IPOs and modify the existing requirement of sustained profits for IPO applicants in a bid to lower the threshold for SME listings.

It's the second time that Li has urged the authorities to prepare for the shift from the approval-based IPO system to one based on voluntary disclosure. At a State Council executive meeting in late March, the premier said the reform should be pushed forward "actively and steadily".

Details at yearend

Former China Securities Regulatory Commission (CSRC) chairman Guo Shuqing proposed the introduction of a registration-based system in early 2012. CSRC spokesman Zhang Xiaojun said in September that details of the reform plan will be finalized by yearend.

The adoption of a registration-based system emphasizing voluntary disclosure would bring mainland IPO rules and practices more in line with international standards. It can also speed up the IPO process because applicants would no longer need to wait in line for the CSRC's approval.

The lengthy process of the approval-based process and other outdated restrictions have prompted many private-sector enterprises to turn to the Hong Kong market for new capital despite the high costs and unavoidable discounts imposed by Hong Kong sponsors to minimize perceived risks. Of the 89 new listings in Hong Kong in the first nine months of this year, 60 were mainland enterprises - up 40 percent from a year ago - according to Hong Kong Exchanges and Clearing Ltd.

"Basically, I feel companies tend to get higher valuation on the Chinese capital market where the cost for 'maintenance' is also lower. What's more, you get full circulation in the larger A-share market," said a senior analyst at a State-owned investment bank based in Hong Kong.

Hong Kong-listed mainland companies' shares held by domestic investors, especially State-owned ones, currently cannot be traded in the A-share market, except for a few cases that were approved by the State Council. This restriction is seen to have blocked the so-called "full circulation" of shares that could affect market prices.

"The problem with an A-share listing now is that the queue for approval by the CSRC is so long, and you really have no idea when it'll be your turn to list even if your application is approved," the analyst said. A registration-based system would change all that, he said. "The timing of an IPO would be decided not by the unpredictable bureaucratic schedule, but by the applicant based on market conditions," he said.

Under the current rules, mainland A-share listing applicants should go through multiple rounds of reviews lasting several years to get approval from the securities regulator. Requirements include an annual net profit of more than 30 million yuan ($4.9 million) for three successive years before listing. In addition, the proposed IPO price has to stay in line with other stocks in the same industry sector, irrespective of the applicant's performance.

"Hong Kong is much faster. A typical IPO process takes less than a year to complete," said Nathan Xue, an IPO team member of a mainland-based energy-related company.

Higher standard

However, getting a listing in Hong Kong is not an easy game for all. Sponsors usually apply a much higher standard of due diligence in examining the viability of an IPO client. Also, the strict valuation standard applied by IPO sponsors is not always acceptable to applicants. What's more, the market is dominated by institutional investors who would only buy the most credible growth stories, analysts said.

"Smaller mainland companies may get the cold shoulder if they fail to convince investors with attractive growth stories," Xue said.

The high cost of securing a listing in Hong Kong has also deterred many potential applicants. The listing fees in Hong Kong are at least three times higher than those on the mainland, analysts said.

"It really depends on the company's strategy. For those externally oriented companies, getting a Hong Kong listing would enable the company to tap the global capital market," said Francis Kwok, vice-chairman of the Hong Kong Stock Analysts Association, and a marketing director at Bright Smart Securities.

xieyu@chinadaily.com.cn

(HK Edition 11/21/2014 page8)