In 2019 at least 12 Chinese companies announced to date their plans to delist from the Stock Exchange of Hong Kong (SEHK) and privatise their assets, roughly a 20% increase on the year before.
This is not uncommon for companies to do this and the reasons for it are varied. Corporate privatisation allows a company to restructure its operations without the need to worry about shareholders. Privatisation sometimes occur after a merger or following a tender offer to purchase a company’s shares.
A very famous example of this is Dell in 2013. With shareholder approval, Dell offered its stockholders a fixed amount per share, plus a specified dividend totalling $25 billion to buy back its stock and delist. After restructuring the business, Dell listed again in 2018 and now boasts a market capitalisation of around $36 billion.
Back to the present day, and in the specific case of SEHK, all the 12 listed companies who either have privatised or are planning to are Chinese; seven of those are either state-owned entities (SOEs) or have an SOE background. The most recent to announce such a move was China Agri-Industries in November.
Source: Huatai International, Hong Kong Exchanges and Clearing
LOW TURNOVER, HIGH COST
The motivation behind these announcements? Each case is different, but there are some common threads: low trading liquidity and a lack of fund raising ability; reduction in the administrative costs and bureaucratic burdens associated with being a listed entity; opportunity to re-engineer the business and dispose of unsuitable assets, with a view to re-listing later on.
Low trading liquidity is a key concern for many listed companies, especially those on the SEHK. Approximately 80% of the capital flow in Hong Kong’s equity market is concentrated in the very high quality/well performing stocks, accounting for about 20% of the market. But this means a large percentage of perfectly good companies witness very little trading turnover on their stock, leading to difficulties in raising extra capital when the need arises. To cement the point, as of December 6, 2019, the trading volume of the top 20 stocks on the Hang Seng Index (HSI) reached approximately $30.3 billion, which accounted for 39.4% of the overall trading volume (at one point the ratio reached 50%). At the other end of the scale, roughly 600 stocks, out of just over 2,400 ended up with no trading at all on the same day.
A decision to delist is a big one; it should not be taken lightly, but it also shouldn’t be viewed in any way negatively. Whatever the reasons for a company’s stock failing to ignite investor appetite, corporate privatisation is an opportunity to re-set the dial and start the company back on a better footing. A renaissance, if you like.
To secure a successful corporate transition, any Chinese Hong Kong-listed company considering privatising its assets must first find the right financial partner to work with. This will very much depend on the vision the company has during and post-privatisation, but any institution must be able to offer a range of cross-border financial services in multiple markets to support it. “Delisting is a delicate process,” explains Gene Liu, a senior executive at Huatai International based in Hong Kong. “Financial structuring skills and a strong capital base to support both a financial solution and advisory role are vital.”
With present day valuations as they are, some Chinese companies are opting to move to the Chinese A-Share market.
A recent example is Bloomage BioTechnology, a hyaluronic acid manufacturer, which delisted from the SEHK in 2017 and listed on the Shanghai Stock Exchange in November. At the time of privatisation, the value of the company equalled to HK$6.07 billion; as of December 6, Bloomage BioTechnology’s market capitalisation reached Rmb38.2 billion, almost seven times higher.
After the privatisation, Huatai United acted as Bloomage BioTechnology’s financial advisor. It introduced several pre-IPO investors and then acted as sponsor help to the company list on Tech Board in Shanghai. The company offers preparations for wound care, lubricants, ophthalmic viscoelastic agents, intra-articular injections, and dermal fillers; it primarily markets its products in China.
Other case studies include Future Land Development, a Chinese property manager and developer. In 2017, the controlling shareholder of the company offered to privatise the company through a HK$5.12 billion share buyout. Huatai International acted as the financial advisor and, at the same time, provided HK$4.5 billion financing in which Huatai acted as sole arranger and lead borrower.
Even outside of Hong Kong, there are plenty of examples of Chinese companies privatising assets in order to rejuvenate the business and start afresh. WuXi PharmaTech is one such example.
In 2015, the pharmaceutical device company delisted assets from the New York Stock Exchange. Wuxi AppTec, one of three companies that were spun off from WuXi PharmaTech, ended up listing in Shanghai in the summer of 2018, and issued H-shares in Hong Kong in December 2018. Huatai United acted as sole sponsor and joint underwriters for the Shanghai leg of these transactions, while Huatai Financial acted as a joint sponsor and joint global coordinators alongside Goldman Sachs and Morgan Stanley for the Hong Kong listing.
When a company is reviewing to delist is stock, it is important to know what the end goal is. The consequences of delisting are significant, but if you identify a cost-benefit to the venture, i.e. the cost of being publicly listed exceed the benefits, then it needs to be seriously considered as a financial option.
On the contrary, it could be the re-birth of your business.