by Fergus Herries, Associate Partner & Mary Devereux, Senior Advisor, SEC Newgate Greater China.
Ecommerce giant Alibaba Group said on Tuesday it would convert its Hong Kong secondary listing into a dual primary listing later this year. It becomes the first big company to take advantage of a rule change in the financial hub to attract high-tech Chinese firms. The main advantage for companies upgrading their listings in Hong Kong is that they can apply to be included in ‘Stock Connect,’ a link to the city's bourse which allows mainland Chinese investors to buy stocks more easily.
The Stock Connect link was first launched in November 2014 between the Shanghai and Hong Kong exchanges and was extended in 2016 to encompass the Shenzhen market. It lets mainland Chinese investors purchase select Hong Kong and Chinese companies listed in Hong Kong and allows foreigners to buy China A shares listed on the mainland in a less restrictive manner than before.
In effect, the Stock Connect programmes create a single ‘China’ stock market that ranks as one of the largest in the world by market capitalisation and daily trading turnover. Commentators are suggesting that Alibaba will attract more than HK$100 billion of mainland money to the market.
Communications are now vital
When companies decide to list on a stock exchange, they often have to promote themselves to a wide range of stakeholders – largely institutional investors such as investment funds and pension firms, as well as individual investors – and prove why they should put trust in their business model.
This should be less of a problem for Alibaba, although investors will be interested in knowing how Alibaba will deliver further growth and diversification in a more complex regulatory environment.
Building a strong narrative
Alibaba, and companies looking to list in Hong Kong, need to build and articulate a strong narrative in the Hong Kong market to explain why investors should believe in the company, its management and its future prospects. This narrative, which takes shape in the registration statement, will form the foundation of all communications throughout the listing process and beyond.
Ensuring strict compliance with its financial disclosures prior to a listing, a company has to create a strategy that allows investors to assess ongoing performance of the publicly traded entity. Inconsistencies between the information provided during the pre-listing communications and that given during the first earnings announcement will call into question the company’s actual performance. Companies must be prepared to answer tough questions from a range of new audiences.
More to follow
The move by Alibaba is likely to prompt other Chinese companies listed in the US to seek dual primary listings and, as a result, Hong Kong can expect to see billions of dollars flowing in from the mainland. In fact, prior to Alibaba’s announcement, HKEX’s Chief Executive Officer Nicolas Aguzin predicted Hong Kong is likely to see more dual-traded companies shift toward primary listings in the financial hub as they seek inclusion in trading links with mainland China. All this is good news for the SAR.