Hong Kong Exchanges & Clearing Ltd. is sending a message to startup companies the world over: We want your business.
The bourse operator on Friday proposed the creation of a new exchange that would allow firms to list before they’ve made a profit and permit dual-class shares, an issue that caused Hong Kong to miss out on Alibaba Group Holding Ltd.’s $25 billion initial public offering. While small-cap trading in the former British colony has for years been plagued by wild price swings and low volume, a third venue would be a chance to compete with international rivals for blockbuster listings such as Ant Financial, Alibaba’s finance affiliate.
In an environment where multiple share classes are becoming more common, HKEX’s plans are an attempt to broaden the types of stocks it can attract. Chief Executive Officer Charles Li said on Friday that Hong Kong has missed out on $50 billion of offerings from mainland companies that either chose the U.S., where dual-class share structures are allowed, or listed in China at a so-called pre-profit stage.
“We want to find ways to make sure we can continue to enhance Hong Kong’s competitiveness as a global financial center, attract high-growth new economy companies, diversify our markets, develop Hong Kong’s new tech ecosystem and generate new additional tax revenue from trading for our government,” Li said at a media event after the proposals were published.
Pre-profit firms made up 68 percent of new listings in the U.S. last year, according to HKEX. The bourse will differentiate who can buy certain stocks on the new venue, with shares of companies available to individual investors forced to meet higher regulatory standards.
Appealing to companies that use multiple share classes or want to list before they’ve shown a profit “is necessary to help address the lack of growth exposures in our market, and to maintain our competitiveness as an IPO venue,” HKEX said in its proposal.
HKEX shares were up Monday, gaining 2.2 percent at 9:40 a.m. local time.
The plans also suggest waiving rules that prevent Chinese companies that have gone public overseas from listing in Hong Kong. In recent years mainland firms including Alibaba, Weibo Corp. and Baidu Inc. have chosen to have their shares traded in New York.
“It’s not a bad thing at all because you can attract companies like Alibaba,” said Dickie Wong, executive director of research at Kingston Securities Ltd. “But such companies — will they list on the third board in Hong Kong when they can list on the main board in Nasdaq?”
Friday’s proposals also addressed the city’s second venue, the Growth Enterprise Market. Plans include increasing the market capitalization of companies before they can list and raising cash flow requirements for IPOs.
Controlling shareholders in Hong Kong will be unable to sell below their controlling stake within two years of debuting, while at least 10 percent of new GEM IPO shares must be issued to the public, HKEX proposed. Applicants from GEM hoping to move to the city’s main exchange will face tougher rules, requiring a sponsor and submission of a prospectus.
The plans are an effort to stem some of the trading issues seen with GEM stocks. The average first day increase for new listings at the venue was 530 percent last year, Securities and Futures Commission data show. Average daily turnover at the bourse this year was $72 million compared to $9.7 billion on the city’s main exchange, according to data compiled by Bloomberg. The S&P/HKEx GEM Index has fallen 16 percent in the past five years while the benchmark Hong Kong Hang Seng Index has gained 33 percent.
GEM-listed funeral provider Grand Peace Group Holdings Ltd. was suspended on Friday after falling as much as 88 percent. It was the biggest plunge since the company started trading in 2000.
“When we created GEM we made too many waivers and no one knew what it stood for,” said Low Chee-keong, an associate professor at the CUHK Business School and a former member of the Hong Kong exchange’s listing committee. “At the start we were a bit too relaxed in our approach.”
Wild stock moves on GEM triggered a warning in January from HKEX and the SFC, reminding participants of the need to ensure a fair, orderly and efficient market. A month later, the regulator suspended GME Group Holdings Ltd. shares on the first day of trading after they rose 543 percent.
GEM companies have also been popular targets for acquisitive Chinese firms chasing back-door listings in Hong Kong after the mainland delayed applications and tightened rules for new offerings.
“In recent years we saw many new issues selling their shareholding within one or two years of listing,” said Matthew Kwok, managing director at China Goldjoy Asset Management Ltd. “Basically they just want to get their listing rights and then sell at a pretty good premium.”
HKEX said it would also more than double the minimum size for main exchange entrants to HK$500 million ($64 million).