In 2019, almost thirty companies were delisted from the Hong Kong exchange, three time more than the previous year after the bourse implemented new rules to expel companies permanently if shares were suspended between 12 to 18 months without any resolution. The company exodus comes as the Hong Kong exchange initiated new guidelines to allow fast growing unprofitable companies with weighted voting rights.
Of those delisted, the Hong Kong stock exchange reported 10 companies withdrawing as part of a plan to privatise (there were 12 privatisation announcements in total during the same period), a 20% increase on the year before. Although it’s hard to predict the exact number of privatisations to occur in 2020, bankers are confident the trend is gaining momentum.
“We are definitely treating this business line as one of our key ones in 2020,” a spokesman at Huatai International, the offshore arm of the Chinese brokerage Huatai Securities, told FinanceAsia. “We are expecting to work on 3 or 4 [privatisation] cases this year.”
Privatisation can happen for many reasons. A primary push factor comes as weaker share prices reflects waning investor confidence, making equity fund raising difficult, expensive, or nearly impossible. This was the case when parent company COFCO Hong Kong bought out the remaining shares it did not own in China Agri-Industrial Holdings, as the offer price of HK$4.25 represented a 34% premium to share price at the time, according to Reuters.
Other influences include the buying opportunity, for the majority shareholders or related party entity, to purchase a company below its intrinsic book value. This also provides an exit strategy for minority shareholders which would otherwise not be able to liquidate their holdings.
When CITIC Pacific bid HK$3 billion ($400 million) to privatise Dah Chong Hong Holdings, the offering was almost 38% above the listed price for the distributor of luxury cars and consumer goods it already had a 57% ownership. Dah Chong Hong holdings had been trading at a discount since 2015, according to FinanceAsia calculations.
What was once a symbol of status, certainly for many Chinese companies, the overall appeal to be publicly listed is losing lustre. Rising costs associate with being a listed, including compliance and legal fees, add to operational expenditure. With markets flooded with cheap capital, privatising provides an opportunity to restructure at more favorable debt terms and conditions. Most the companies reviewed by the FinanceAsia editorial team were heavily geared.
Huaneng Renewables, one of China’s biggest wind power producers, reported more than Rmb52 billion ($7.55 billion) on its balance sheet in the middle of last year according to company filings, compared to market value of Rmb29 billion. AVIC International currently sits on more than Rmb38billion on a market value of Rmb8.5 billion, with interest expense exceeding net profits for two consecutive years.
Frankly, no one enjoys being the company chairman when stocks prices plummet to earth, having to communicate to the market what the company did wrong. By the far the biggest luxury of being private is to maintain a closed book. When CP Lotus asked its parent company for HK$425 million to privatise the Chinese supermarket chain, the stock price sat below HK$0.10, a literal penny stock. Closing book allows a rejig at the traditional brick and mortar business model as e-commerce platforms gain take greater market share.
But should an investor find a stock that trades below book value, high debt burden, or a parent company holding the majority shares, would this be indication to buy the stock? “No. Companies need good fundamentals and a growth story. Privatisation alone is not a good reason to buy the stock,” said Eric Ritter, a former Asia hedge fund manager and current adjunct professor of economics for Lakeland University in Tokyo. “Fine, the stock is cheap. But it might get cheaper. And you’re stuck holding the paper.”
And although privatisation may prove a useful revenue stream for those financial institutions involved in them, the primary focus is still getting fresh blood onto the Hong Kong bourse.
“For 2020 IPO listing in the Hong Kong main board, we think the total numbers should turn out close to 2019, around 150 companies,” the spokesman for Huatai International said. “We are expecting quite a few US-listed Chinese firms to prepare a secondary listing.”
Additional reporting by Daniel Flatt