Chinese smartphone and electronic device maker Xiaomi has filed for an IPO in Hong Kong valued at $10bn, making it one of the biggest listings in years and a decision which will carry Hong Kong’s financial markets into the limelight, and for good reason. This was the second biggest Chinese tech IPO since Alibaba’s 2014 listing on the NYSE at over $20bn and there was a reason as to why Alibaba did not decide to list in Hong Kong. Xiaomi’s listing has occurred at a pivotal moment in time for Hong Kong’s market which recently adopted new listing rules. These new rules open up the HKEX, opening doors for companies and sectors which were once shunned.
The Catalyst of Change
A large factor which prompted these new regulations was Alibaba’s loss of patience with HKEX, resulting in the biggest IPO in history being lost to the NYSE. The lack of regulatory accommodation for the weighed voting right (WVR) structure of Alibaba, giving the minority stockholders control over the majority of the board of directors, was one reason it stayed away from Hong Kong. This, along with other pull factors from the NYSE, such as US dollar-denominated listing and global scope, was a wake-up call for the HKEX to revamp its framework and make up for potential future losses.
HKEX’s Evolution
Following a consultation paper in December 2017, new listing regulations were proposed to incubate growth in emerging sectors and increase the global competitiveness of the HKEX by decreasing selected entry barriers. There were three significant changes:
- To allow companies with WVR structures to list in Hong Kong
- To allow Mainland Chinese companies who wished to list secondarily in Hong Kong to now list.
- Pre-profit companies and companies who do not meet standard financial eligibility benchmarks in certain sectors to list.
Furthermore, a plan of market segmentation was proposed, to divide the market into two boards:
- New Board Pro – Target at earlier stage companies with great potential but do not meet minimum standards of listing.
- New Board Premium – Targeted at mature companies which meet standard financial requirements, but are unable to list due to non-standard governance structures such as WVR.
How Adaptation leads to Success
These changes aim to expand the scope of potential companies in Hong Kong’s markets. The initiative of adaptation will allow Hong Kong to thrive as seen by Xiaomi’s recent listing. The HKEX’s Cheif Executive, Charles Li stated:
“In the past few months, we have collectively decided to take a big step forward as a financial centre and welcome emerging and innovative companies. Now, we are proposing a listing regime that will boost Hong Kong’s attractiveness for a new generation of companies as well as investors, bringing more dynamism to our stock market.”
The concept of creating segmented listing boards allows for a broader spectrum of companies to list while allowing shareholder standards to be protected. Hong Kong has always had a successful stock market, with a market cap of over $3.3tn and ranked 3rd in Global markets for IPO in Q1 of 2018. Hong Kong’s success stems from an extremely solid legal system, transparent taxation and established network especially with mainland Chinese companies. And with these new rules put into place, Hong Kong’s future looks promising as it adapts to the market and Xiaomi’s listing is a testament to HKEX’s future success.
This post appeared first on The Market Mogul.
