Lead Story: Rising interest in a Hong Kong listing

This article first appeared in Capital, The Edge Malaysia Weekly, on May 28, 2018 - June 03, 2018.
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Hong Kong Exchanges and Clearing Ltd (HKEX) is a place where exciting things happen. Last year, it was ranked the third busiest stock exchange globally in terms of initial public offerings, after a record 174 companies raised a total of HK$128 billion (RM65 billion).

Over the years, HKEX’s attraction as a listing venue has increased, given its availability as an international listing platform with a large professional investor base offering issuers global branding and business expansion opportunities.

A flexible fundraising regime also allows companies to make timely commercial decisions about undertaking an IPO as well as post-listing exercises.

A Hong Kong listing is also attractive because of the high liquidity and active market trades. HKEX’s average daily turnover, for instance, is HK$88.2 billion — about 10 times higher than Bursa Malaysia’s. More-over, certain industries — such as consumer goods, energy and healthcare — often enjoy superior IPO pricing and valuations.

Many may not be aware that Malaysian companies make up the second largest group of foreign firms on the HKEX, second only to the Taiwanese.

Last year’s listing on the HKEX by three Malaysian companies — Linocraft Holdings Ltd, Furniweb Holdings Ltd and BGMC International Ltd — was followed this year by Pentamaster International Ltd and Kingsley EduGroup Ltd (see table).

Lam Soon (Hong Kong) Ltd — a member of the Hong Leong Group — was the first Malaysian company to list in Hong Kong in 1972.

Between then and 2009, only 10 other Malaysian companies followed suit. In comparison, over the past two years, eight Malaysian companies have listed on the HKEX.

Naturally, most local companies prefer to list on Bursa as they are more familiar with the rules and regulations, giving them a home turf advantage. Also, it costs more to maintain a listing in Hong Kong than in Malaysia. In addition, the competition for attention — especially against bigger companies — is more intense in Hong Kong.

Bursa is home to almost 1,000 companies while HKEX has more than 2,000. To be a small fish in a big pond, a company has to be willing to incur higher listing costs.

A quick survey of the market reveals that in Hong Kong, the listing cost for a Main Board company is around RM25 million — about five times more than for Bursa’s Main Market. Likewise, listing expenses for HKEX’s Growth Enterprise Market (GEM) amount to about RM10 million, compared with RM2 million for Bursa’s ACE Market.

So, is a Hong Kong listing worth the hefty premium? The short answer is “yes”, because the listing status of a HKEX company is worth more than a Bursa-listed entity.

While there is no exact market rate for the listing status of a Bursa-listed entity, most corporate observers estimate the worth of a Main Market shell company at RM10 million to RM20 million and an ACE Market shell company at RM5 million to RM10 million.

However, the listing status of a HKEX Main Board company could be worth as much as HK$600 million (RM304 million), while the shell of a GEM company could fetch HK$200 million (RM101 million).

Interestingly, Hong Kong billionaire Pollyanna Chu Yuet-wah — co-founder of Kingston Financial Group Ltd — has been dubbed the “Queen of Shells” because of her penchant for financing small-cap companies.


Crackdown on the manufacturing of shell companies

In recent years, Hong Kong’s securities watchdog, the Securities and Futures Commission (SFC), has been working closely with the HKEX on initiatives to address backdoor listings and shell activities as regulators are concerned about potential candidates circumventing the IPO requirements and vetting process.

Last year, Chinese entrepreneur Li Hejun — who founded solar energy group Hanergy and who briefly held the title of China’s richest man — was banned from participating in business activities in Hong Kong for eight years. This came after the stock price of his Hanergy Thin Film Power Group Ltd tanked abruptly on May 20, 2015, wiping out US$19 billion in market value within half an hour.

The Hanergy investigation drew attention to the role of shell companies in Hong Kong small-caps and the conflicts of interest between Hong Kong-listed businesses and their mainland Chinese parent companies that draw financing from the Hong Kong market without being subject to its disclosure rules.

The Chinese IPO market has a backlog of companies looking to go public with more than 600 still in the queue. An easy solution would be to go for a backdoor listing in Hong Kong, notwithstanding the problems it creates for the HKEX.

Because of the rising demand for shell companies from China, certain players are leveraging the opportunity to manufacture shells to be sold later.


Call it shell listing, surrogate listing or artificial listing

Basically, an entity goes for a listing and two years down the road, the assets that were supporting the listing are hived off and sold back to the entity. Subsequently, the China assets are injected into the entity, thus completing a backdoor listing. Hong Kong authorities, namely the SFC and HKEX, have started to clamp down on these shell manufacturing activities.

Datuk Seri Cheah Cheng Hye, chairman of Hong Kong-listed Value Partners Group Ltd, notes that mainland Chinese buyers who cannot wait for a natural listing because of the long queue are willing to pay a huge price for a HKEX listing status.

The Penang-born fund manager says that in recent years, there has been a trend of opportunistic Malaysian business groups assembling their business units to qualify for a listing in Hong Kong with the aim of taking advantage of the premium prices for a Hong Kong listing.

“I have heard that the listing status of a GEM-listed company could be worth around HK$200 million to HK$400 million, and a Main Board-listed company HK$500 million to HK$800 million,” Cheah tells The Edge.

He acknowledges that a Malaysian company only needs to spend HK$20 million to HK$40 million in expenses to qualify for a listing and then it can sell the listed vehicle as a shell company for hundreds of millions of Hong Kong dollars in cash later.

“It is important to note that there are quite a number of Malaysian-controlled companies in Hong Kong that are solid businesses that have legitimate reasons to list in Hong Kong. But it is also true that some come to Hong Kong just to take advantage of high prices for listed-company platforms.”

Cheah, who serves as an independent non-executive director of HKEX, stresses that Hong Kong does not welcome artificial listings.

“The Hong Kong authorities are taking steps to discourage shell listings. Neither the Hong Kong regulators nor the stock exchange are in favour of such practices but there are still people who engage in these activities,” he says.

According to a senior corporate observer, the issue of “how much is a shell worth?” is an extremely sensitive question in Hong Kong.

“The moment you get listed, or even when you get approval for the listing, some people would ask you whether or not you want to dispose of the shell. If you ask them how much they are willing to pay, I am sure you would get the shock of your life!” he says.

His advice to these companies: “Don’t even think about it, unless this is your last resort.

“If you are 35 years old, you should be more ambitious and grow the business and the company. But when you are 75 years old, I am sure you would be tempted to dispose of the shell and take the money,” he says.

A veteran dealmaker highlights that the value of a listing status on the HKEX has been declining in the past three years, mainly due to the crackdown on shell-listing activities by the Hong Kong authorities.

“The interest from China is still strong but when it comes to actual activities, many people back off. Some companies might panic as they do not want to face the hassle of being questioned and monitored by the authorities,” he explains.

The dealmaker adds that it is not right for any company to seek a listing with the intention of selling the status to another party; then again, it is almost impossible for the authorities to find out.

“To me, if you get listed in Hong Kong with the intention of selling the shell, you are selling your soul. It is very risky,” he says.


Legitimate reasons to list in Hong Kong

Of course, not all companies going for listing on the HKEX are manufacturing shell companies.

Legitimate reasons include a diversified investor base in Hong Kong as well as the vibrancy of its ecosystem, which includes active private equity firms and analysts as well as fund management firms.

Datuk Feizal Mustapha, chairman and executive director of advisory at BDO Malaysia, says that from a business perspective, the appeal of getting listed in Hong Kong is very high given its international profile.

“Some Malaysian companies listed in Hong Kong are purely based in Malaysia, but they may have aspirations to expand into China and other Asia-Pacific countries,” he tells The Edge.

BDO Malaysia is one of the “Big 5” global professional services firms, providing businesses and corporations with audit and assurance, advisory, tax and business services and outsourcing.

Feizal acknowledges that, despite higher listing expenses, there is a certain allure for Malaysian companies to list in Hong Kong.

“There is a certain glamour to being listed on the HKEX. In fact, most of the companies listed in Hong Kong have some kind of international background and the market is reputed to be a very open market, receptive to foreign companies,” he says.

BGMC International CEO Datuk Michael Teh is of the view that HKEX could provide a company with a platform to work on cross-border deals with Chinese firms.

“We need to position ourselves. We might not be able to see the immediate result on our platform, but we believe that we are still on the right track to achieve something in the future,” he tells The Edge.

BGMC — named after its founding chairman and executive director Tan Sri Barry Goh Ming Choon — is the first Malaysian construction firm to list on the Main Board of the HKEX.

Teh says BGMC has seen more business opportunities following its listing in August last year, as enquiries have come from China, Southeast Asia, Nepal and Bangladesh.

“Previously, overseas firms did not recognise us. But today, when we tell them that BGMC is a Hong Kong-listed firm, their reactions totally change. We have never seen so many opportunities before but, of course, whether these opportunities will be turned into successful projects is another story,” he says.

BDO Malaysia’s Feizal opines that Malaysian companies should not find it difficult to attract Hong Kong investors so long as they have a good business model and a nice growth story supported by a strong management set-up.

One indicator is the extent of oversubscription of IPO shares. Linocraft’s offering was oversubscribed by 80 times and Furniweb’s 160 times.


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