With a stock valuation ranging between $150 billion to $200 billion, Ant Group, the online payment service provider behind Alipay, is expected to be among the largest deals for 2020. But the mobile payment platform is also grabbing attention by choosing to dual list in Shanghai and Hong Kong, preferring to go public back home and skip New York.
Capital raising outside New York reflects the increasingly hostile environment that US-listed Chinese companies are currently facing. Besides trade tariffs, Chinese technology companies worry over being denied access to American technology or software, while de-listing concerns have amplified following the Luckin Coffee scandal.
The decision follows other Hong Kong mega deals for Chinese tech leaders. Alibaba raised $13 billion in late 2019, while JD.com and NetEase together accumulated $7 billion in secondary offerings this past June.
Elevated tensions between the two largest economies is pushing investors to take profits off the recent rally in global equities. Asian stocks were sold lower after Beijing closed the US consulate in Chengdu in retaliation for having its consulate in Houston suddenly closed.
Besides the push out from the US, the pull into China allows companies to leverage their commercial reputation. Ant Group’s mobile payment platform commands more than 55% market share in China and is used by more than 1.2 billion globally.
A China STAR Is Born
"Inevitably, a chain effect is created that will accelerate the growth of Chinese equity markets, notably in Hong Kong, Shanghai, and Shenzhen," Jacob Fabrice, portfolio manager at JK Capital Management told FinanceAsia.
Choosing to list in both Hong Kong and Shanghai, not only utilises reforms in the former, which have been implemented since missing out on Alibaba’s $22 billion IPO in 2014, but more critically recognising developments in the latter.
Ant Group’s announcement to go public on the STAR Market coincides with the bourse’s first anniversary. When the tech-oriented exchange premiered, investors fretted over equity valuations and wild share price swings, since no price limits are set during the first trading week.
In the subsequent 12 months, the STAR Market has attracted more than a hundred companies to float shares, building a market value of almost RMB 3 trillion. Valuations remain pricey, where the initial 25 companies now trade at more than 130 times their current incomes, almost ten times higher than either Hong Kong or China’s main indexes.
But retail investors are demonstrating their capability to support larger deals, showing enthusiasm for companies those that are globally competitive. Labelled China’s Taiwan Semiconductor Manufacturing Company (TSMC) for its ambitions to build out foundries for computer chips, Semiconductor Manufacturing International (SMIC) raised nearly $8 billion on the Shanghai STAR market in mid-July, with the share price tripling during its debut.
“The Shanghai STAR market has taken centre stage as companies raise money to take advantage of China’s drive to source critical tech components domestically” says Sean Darby, strategist at Jefferies.
Future Implications
While mainland markets offer enough capital for Ant Group, dual listing in Hong Kong enables deeper trading turnover and a pathway for other technology companies to follow. Hong Kong listed e-commerce company Meituan Dianping and consumer electronic company Xiaomi appears as comparable names.
This occurs as technology and new economy stocks are expanding their influence across other Chinese exchanges. Last week, the Shanghai Stock Exchange released the SSE STAR Market 50 Index, while the Shanghai Composite Index revised its compilation methodology to now include STAR traded names.
The Hang Seng Tech index commenced on Monday to encapsulate Chinese technology companies trading in Hong Kong.
Capital developments for Chinese tech names should continue to attract more foreign investors, particularly as passive and index investing take increasingly more assets under management (AUM) away from active funds.
Trends on the Shanghai-Hong Kong Connect, where overseas institutional investors can buy Chinese stocks, reflects this eagerness. “Northbound flows record net inflow of RMB 136 billion during the last quarter and RMB 173 billion year-to-date,” according to a note by Christopher Wood, equity strategist at Jefferies.
“Despite the geopolitics, interest in China A shares continues to grow,” says Cecilia Lee, Managing Director of a New York-based boutique placement. “The domestic market performance has not gone unnoticed and investors are responding to the recovery in corporate earnings and economic data. Investors generally have a long-term positive view on the world’s second largest economy.”
New York still New York
Despite the appeal to go public in China, few companies can truly resist New York. Year-to-date, 19 Chinese companies have floated shares in the US, up from nine at this point a year ago.
Fintech company Lufax, backed by Ping An Insurance and valued at $38 billion, announced plans to raise around $3 billion in the US as early as this year. Lufax postponed a Hong Kong float in 2018 amid uncertainty over China’s consumer lending regulation.
Analysts note that fintech companies have found listing in the US easier, while larger companies will likely enjoy a boost from sector coverage. Any enforcement from US legislation is also a few years down the road, which provides some breathing room.
However, volatility over the upcoming months is expected. A poll conducted by UBS found that almost half the respondents ranked the US election among the biggest worries, up from 39% in the three months prior. Those surveyed plan to adjust their portfolio based on who wins the US presidency in November.
