IPOs in Asia

JD.com sails into Hong Kong with $4bn listing: who's going to be next?

Pundits have been calling Hong Kong's demise for decades, but with the rush of Chinese listings bringing in fresh liquidity, is it too soon to call time on the city as a financial hub?

Ample liquidity and international politics have triggered a number of secondary listings in Hong Kong for Chinese tech names who see value in being closer to their home markets.

The latest is JD.com, whose HK$31.4 billion ($4.05 billion) secondary share sale comes on the heels of online gaming giant NetEase which raised $2.7 billion last week and that of Alibaba in November last year, which raised $11.2 billion (and was named FinanceAsia deal of the year).

The Nasdaq-listed e-commerce behemoth is gearing up for what could be the biggest initial public offering of the year so far in Hong Kong.

It is selling around 133 million shares or roughly 4.3% of its enlarged share capital in Hong Kong at up to HK236 per share. Bank of America, CLSA and UBS are the sponsors and are joined as joint global coordinators and joint bookrunners with BOC International, CCB International, China Renaissance and Jefferies.

There is also a 15% greenshoe.

The retail subscription will run until tomorrow, 11 June, which is also when the deal is expected to price.

The shares will start to trade on 18 June. This is an auspicious day for the company. Not only is it the company’s own birthday – it was founded by Richard Liu in 1998 – it is also the date of what has become China’s largest mid-year shopping festival.

JD.com said in its prospectus that it intended to use proceeds “to invest in key supply chain-based technology initiatives to further enhance customer experience whilst improving operating efficiency”.

The outlook for the shares is good. JD.com’s shares are up 120.8% over the past year, according to Bloomberg, and at the start of the week, bankers were already saying that books were covered, many times over.

Analysts too are in favour of the move. While shares of Alibaba and Pinduoduo appear to have hit maturity, the US shares of JD.com still have room to grow. “Like Alibaba Group, Hong Kong will be a meaningful trading venue for JD.com,” said Global Equity Research’s Arun George who publishes on Smartkarma.

POLITICAL PRESSURE

Part of the reason that Chinese companies are looking at a secondary listing closer to home is to protect themselves as tensions continue to escalate between China and the US.

This is explicitly acknowledged by JD.com in its prospectus. “In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs,” it warned.

Hong Kong is the latest battleground after Beijing announced that it intended to impose national security legislation, eliciting squeals of outrage from the White House.

But rather more pertinently, plans by Nasdaq to restrict IPOs after the spectacular implosion of Luckin’ Coffee, have been seen as a broadside at Chinese names.

There have long been concerns at the US stock exchange about the lack of financial transparency at Chinese companies, the thin liquidity after they list, and the fact that too many of them look like hard currency exits for the owners.

According to Reuters, the new rules mean that companies will need to raise more than $25 million on the stock market. More than a quarter of those Chinese companies to have done so since 2000 have raised less than that, according to Refinitiv data.

AMPLE LIQUIDITY

A more positive reason for the move to a secondary listing in Hong Kong is the ample liquidity that is available in the region.

“In both of these previous crises, the local Asian investor base wasn’t that deep in terms of liquidity. If you think about the wealth that exists now in China, Hong Kong and Singapore, this wealth is from people that make money in the region. When they are saving their money, they are investing in bond funds or in equity funds and are very comfortable with risk being deployed in the region,” said Fredric Teng, head of high yield capital markets for Greater China and North Asia at Standard Chartered, on a recent webinar.

A sense of the scale of the liquidity can be seen by the region’s perennial economic canary – Hong Kong property.

The Centa-City Leading CCL index, which tracks secondary house prices, increased every week in May, while housing transaction volume rose for the fourth consecutive month to a one-year high of 5,984 deals in May.

Selena Ling, head of research and strategy at OCBC Bank, outlines the reasons for this optimism. “The rally in investment sentiments, lowered local rates, persistent undersupply of land and homes, as well as pent up demand from the higher income group who has been less affected by the pandemic,” she said.

A similarly upbeat sense of liquidity came from HKMA’s chief executive Eddie Yue last week. “You will recall that during the social incidents last year, there were also rumours about the linked exchange rate system (LERS) and capital outflows. Some 'experts' even advised the public to sell the HKD for the USD. These rumours turned out to be all wrong. We saw fund inflows instead of outflows,” he said.

It is also worth noting that Alibaba’s Hong Kong freefloat shares as a percentage of Hong Kong-registered shares have risen at an increasing pace and currently stand at 36.9% (versus 11.1% at listing), according to Global Equity Research’s George. 

Although shares in NetEase do not start to trade until tomorrow, 11 June, both it and JD.com are likely to do well. 

The only question now, is who will be next?

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