Between 2010 and 2011, foreign companies flocked to Hong Kong for IPOs. Household names like Prada, Samsonite and L’Occitane vied for attention with energy and resources companies like Brazil’s iron ore producer Vale, Canadian coal miner SouthGobi and Russian aluminium giant UC Rusal. British life insurer Prudential also threw its hat in the ring, offering a fraction of its global shares for Hong Kong investors.
There was a moment when Hong Kong’s equity market appeared to be truly becoming a global titan. But the moment passed.
British jeweller Graff Diamonds, soccer club Manchester United and auto racing series Formula One all decided not to list in 2012. Few foreign companies have sold shares in the market since. Those that have tend to be small, little-known companies.
Perhaps more worrying, some foreign companies have decided to exit the market entirely. Vale, Malaysian funeral services company Nirvana and casino operator Melco Crown Entertainment have all declared their intentions to delist from the Hong Kong stock exchange.
This is not a deathblow to the market. There are still plenty of executives hoping to list - with Postal Savings Bank of China pulling off the world's biggest IPO in two years just last week. But the gradual loss of foreign companies has put into question whether Hong Kong can still be able to justify its claim to be a global equity-listing hub.
Not so fast
In a newsletter in 2011, HKEx boldly stated that listings by international issuers had become the bourse’s new driver of growth. Five years on, that optimism has turned out to have been misplaced. Hong Kong, it is clear, has lost its lustre for foreign issuers.
This is partly because of the decline in some sectors that often provide a good source of listings in good times. Falling commodity prices mean energy and resources are less likely to list in the near future, said Jonathan Hsui, a corporate partner at international law firm Ashurst. Foreign retailers, suffering from declining revenues, are also in no mood to list.
But this only tells part of the story.
Much of the rationale of foreign companies listing in Hong Kong five years ago was simply getting closer to China. The argument that a Hong Kong listing would help companies increase their business on the mainland rarely stood up to scrutiny. But it was an oft-repeated line among origination bankers.
That line no longer works.
“As China continues to experience a slowdown in economic growth, the attraction of a Hong Kong listing as a stepping stone for China expansion has decreased,” said Lina Lee, a corporate partner at Ashurst.
The irony is that doubts about China — by hurting the supply of foreign issuers in the market — only exacerbate mainland corporations’ dominance in Hong Kong.
Chinese firms raised $31.3 billion from first-time share sales in Hong Kong last year, according to Dealogic. That was a whopping 92.4% of total IPO volume. In 2010 and 2011, respectively, Chinese firms contributed just 61.6% and 37.8%.
The shift towards Chinese firms is, at least in part, the natural result of China Inc’s push to raise more offshore capital. But HKEx has strengthened its ties with China, for example though the implementation of the Shanghai-Hong Kong Stock Connect scheme in 2014. A similar link between Hong Kong and Shenzhen is due to come online in December.
From a profitability perspective, China Inc’s dominance in Hong Kong’s IPO market should not immediately worry the exchange, given Beijing’s overseas expansion will ensure decent deal flow for a few years. But hosting IPOs from only one country is not the mark of a global financial centre.
This has been noticed even by those who might be expected to talk up the global nature of Hong Kong’s stock market.
Timothy Parker, chairman of Samsonite and former deputy mayor of London, said the attractiveness of Hong Kong as a listing venue was its regulatory regime, the abundant liquidity and the huge variety of investors that can invest here.
“We could have listed anywhere but we chose Hong Kong because it is the biggest financial hub in Asia, where the majority of our business is,” Parker told FinanceAsia in an interview.
But he admits Hong Kong lags behind other stock exchanges in terms of geographical variety. “To me, New York and London are the only stock exchanges that are truly global,” Parker said.
There are glimmers of hope. The rise of Chinese listings has certainly not ended Hong Kong’s global ambitions. There are still foreign companies looking to list, albeit not the well-known names that flocked to the market before.
“Although we have since 2015 seen certain foreign companies choosing to delist from Hong Kong for their own particular reasons, we have also seen at least three foreign companies listed in Hong Kong in addition to five others that have submitted their listing applications,” said Wang Hang, a partner at Baker & McKenzie’s capital markets practice in Beijing.
But most of these companies are virtually unknown especially in Asia and are relatively small in terms of business scale. French medical device manufacturer Echosens, one of the foreign companies planning to list in Hong Kong, reported net profit of HK$72 million last year — only slightly above HKEx’s mainboard listing requirement of HK$50 million.
In fact, HKEx has failed to attract large corporations outside Asia for some time. Not a single European or US company has raised over $100 million through a Hong Kong listing since 2011.
Wang believes HKEx could make itself more attractive to foreign companies by extending the functionality of the Shanghai-Hong Kong Stock Connect, allowing mainland investors to subscribe to Hong Kong IPOs. This initiative is in HKEx’s strategic plan for 2016-2018, Wang said. “If it goes ahead, it could fundamentally change Hong Kong’s proposition as a listing venue for international issuers and offer new diversification opportunities for mainland investors,” he told FinanceAsia.
The dominance of Chinese corporations might even help increase foreign assets listed on the exchange. Hong Kong-listed Fosun Pharma said earlier this year it was planning to spin off Sisram Medical, an Israeli subsidiary, for a separate listing. A successful IPO could encourage other Chinese conglomerates to list their overseas assets in Hong Kong, said Ashurst’s Hsui.
But there is little doubt Hong Kong has become a less attractive place to list for foreign companies. In an analyst briefing in January, Charles Li, chief executive of the exchange, set out his vision of HKEx as “the global exchange of choice” for Chinese clients and international clients trying to get closer to China.
He appears to have cracked the Chines side of that equation. But convincing international issuers to return does not seem to be a top priority. That is a shame for investors in the market. Hong Kong has long been touted as a global exchange. But as time has gone on, it’s become a little less global.