Capital markets in Hong Kong SAR are buzzing with exercise in 2024.
Mainland China’s largest freshly made bubble tea chain, Mixue Bingcheng, utilized for an initial public offering (IPO) on the Hong Kong Stock Exchange (HKEX) and is trying to increase US$500 million to US$1 billion.
Mainland China web large Alibaba Group continues to record its good logistics arm Cainiao on the HKEX. That is the primary spin-off itemizing totaling greater than US$1 billion since August 2022 and could possibly be among the many hottest IPOs in Asia this yr, according to Bloomberg.
In reality, Alibaba Group is neither the primary nor doubtless the final to have interaction in subsidiary spin-offs and subsequent IPOs. From 2018 to August 2022, 664 corporations IPOed in Hong Kong SAR, and of those, 64, or nearly 10%, went public by way of spin-off listings.
So, what’s behind the enchantment of spin-offs usually and in Mainland China and Hong Kong SAR, particularly? I sat down with KPMG accomplice Mike Tang, CFA, CPA, for his perspective. A full video of our dialog is offered in Cantonese and Mandarin.
Unlocking Potential Worth
So many listed corporations are eager on spin-off IPOs in Hong Kong SAR as a result of they ship worth to shareholders.
“One of the enticing elements of spin-off listings lies within the means to unlock the potential worth of associated — generally secondary — companies and maximize shareholder worth,” Tang says.
Conglomerates with a number of enterprise traces determine the enterprise section with the best development potential — typically these are asset-light companies — after which look to record them individually by way of the spin-off. By the valuation course of, the market helps notice the potential worth of those companies.
Typically the spin-off results in an attention-grabbing phenomenon whereby the market capitalization of the spin-off subsidiaries, because of increased price-to-earnings (PE) ratios, surpasses that of the guardian firm. In different phrases, the elements come to be value greater than the entire, which completely illustrates the enchantment of spin-off listings.
The identical rationale applies to spin-off listings on the A-share market in Mainland China. These contain extremely sought-after idea shares or rising industries. The identical enterprise section, when listed on the home A-share market, advantages from increased valuation. In the meantime, the guardian firm retains its possession and management over the newly listed subsidiary, sharing the industrial advantages introduced by the itemizing and additional driving up its personal inventory value. Within the case of Alibaba, the group retains possession of over 50% of Cainiao’s shares. This win–win state of affairs appeals to each the listed corporations and the foremost shareholders.
“Greater than 30 Hong Kong–listed corporations have efficiently landed their enterprise segments on the A-share market through spin-off listings since 2018,” Tang says.
Diversifying Financing Channels
Spin-off listings additionally assist diversify an organization’s financing channels. For instance, even with immense development alternatives, biotechnology corporations typically lack entry to funding throughout their analysis and improvement phases. This will depart them pressed for money. The spin-off itemizing opens an unbiased financing channel for the subsidiary. It establishes clearer and extra enticing positioning and offers the guardian firm added flexibility in its capital operations.
Having each onshore and offshore financing channels is a large profit, based on Tang. “The impact of diversification is very evident when the group has unbiased financing platforms each domestically and internationally,” he says. “It helps mitigate the impacts of particular person market volatilities on the group’s general financing capabilities and resilience.”
Enhancing Operational Effectivity and Competitiveness
Spin-off listings can assist corporations reassess their companies in order that each the guardian firm and the subsidiary can concentrate on their core segments. This, in flip, improves operational effectivity and general competitiveness. As well as, the fairness incentive launched by the spin-off motivates the subsidiary’s administration group and staff to realize higher efficiency.
Making Hong Kong SAR a Capital-Elevating Hub
For Hong Kong SAR particularly, the emergence of spin-off listings has boosted its competitiveness by rising the variety of new financial system listings, particularly giant, revolutionary platform corporations. Nonetheless, regulatory safeguards assist strike a stability between enhancing Hong Kong SAR’s competitiveness and defending buyers.
Hong Kong SAR–listed corporations looking for to spin off their companies into separate listings have to use to the HKEX in accordance with the Itemizing Guidelines Observe Notice 15 (PN15). Tang identifies three key areas that the alternate focuses on when reviewing spin-off itemizing purposes:
1. Will the Guardian Firm Nonetheless Meet the Itemizing Necessities after the Spin-Off?
The HKEX examines whether or not the guardian firm will retain adequate belongings post-spin-off and whether or not the remaining enterprise will conform to the alternate’s itemizing standards round profitability and market capitalization, amongst different necessities.
2. Does the Spin-Off Itemizing Serve the Pursuits of Present Shareholders?
Not solely does HKEX think about the character of the spin-off enterprise itself, nevertheless it additionally examines how a spin-off itemizing will influence present shareholders. For companies with promising returns, the HKEX focuses on how the guardian firm can derive industrial advantages by retaining management over the subsidiary.
3. Will the Spin-Off Be Unbiased from the Guardian Firm?
PN15 explicitly requires that newly listed subsidiaries be unbiased from the guardian firm when it comes to enterprise, finance, and administrative administration.
“Linked transactions between the newly listed subsidiary and the guardian firm are of specific concern,” Tang says. “As the 2 grow to be separate listed entities with their very own shareholders, HKEX should ensure that there are not any suspicions of transferring advantages to main shareholders by way of linked transactions.”
Proceed with Warning
Corporations looking for to spin off elements of their enterprise into separate listings ought to conduct a complete assessment beforehand. They need to analyze market sentiment in addition to the scope of the deal and what it might imply for the diversification of their enterprise. They need to additionally think about the potential obstacles {that a} spin-off itemizing might create.
That requires growing a concrete technique and a long-term plan that takes into consideration the ideas that the HKEX laid out. If the spin-off necessitates restructuring, the businesses ought to have interaction with the related intermediaries early on to make sure a clean itemizing course of.
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