Asia Corner: Post-Pandemic Hong Kong Moves to Fortify Status as International

POST-PaNDEMiC hONg kONg MOvES TO FORTiFy STaTuS aS iNTERNaTiONal FiNaNCial huB

Over the past two years, Hong Kong’s economy has been crushed by economic disruptions from the Covid pandemic and market volatility fuelling speculations the SARs will end the year in a recession.

While the majority of the world had already lifted their strict pandemic controls, Hong Kong only recently removed its strict quarantine measures. The hesitancy to open up along with the rest of the world put extreme pressure on Hong Kong’s status as an international financial centre. Furthering these concerns is Hong Kong dropping to fourth place in the 32nd edition of the semi-annual Global Financial Centres Index while Singapore moved up to the third position. As businesses faced a string of disruptions, tourism remained at a standstill and mass international events were eliminated, the labor force shrank to a decade low with top talent departing to rival economies such as Singapore, Thailand and many other western markets.

Further weighing on the markets is an uncertain global economic outlook, rising interest rates, a dearth of big IPO offerings and continued Covid-19 concerns in China which pushed the Hang Seng Index down 26 percent for the year, as of the end of September. The Hang Seng Index is currently sitting at its lowest level since October 2011 and is one of the worst-performing major benchmarks globally.

Despite the challenging market conditions, Hong Kong was able to take fourth place in IPO funds raised in the first nine months thanks to renewed activity in the third quarter and a blockbuster listing from China Tourism Duty Free, the biggest IPO of the year. For the first nine months of 2022, Hong Kong saw 47 IPOs raise US$8.8 billion, the lowest since 2013. Homecoming listings continued to drive IPO activity with eight US-listed Chinese companies listing in Hong Kong in the first 9 months of the year. The homecoming listings have a combined market capitalisation of over HKD470.0 billion and contributed to more than 30% of total IPOs’ market capitalisation year to date. While 27 new listings in the third quarter raised a total of US$6.6 billion, almost three times the funds raised in the first half, appetite for IPOs remains weak amid the market volatility.

Having a pipeline of more than 140 listing applications, including China concept stocks, biotech companies, and a few potentially huge listings, Deloitte’s CMSG forecasts that 70 IPOs will raise at least HKD110 billion in Hong Kong by the end of 2022. Even as the recent debuts from electric-vehicle maker Zhejiang Leapmotor and China Vanke’s property service unit, Onewo, struggled to raise funds at the lower end of their pricing, companies set to list in the city include Betters Medical Investment Holdings, CALB, Flowing Cloud Technology and AIM Vaccine.

Widely sought after by the market in Hong Kong and overseas, Flowing Cloud Technology, is highlighted as Hong Kong’s first metaverse stock. The company ranks first in China’s AR/VR content and services market, accounting for 13.5 percent of the market share. Its IPO officially launched on 29 September and is expected to raise around US$ 100 million. On

the first day of book building, the public offering tranche was oversubscribed 5 times.

China Aviation Lithium Battery (CALB), the country’s third-largest electric vehicle battery maker, is pursuing an IPO to raise US$1.3 billion after pricing at the low end of its range of HK$38-HK$51 with the listing date on October 6th. CALB’s Hong Kong share sale follows the initial public offering by lithium ore miner and EV battery maker Tianqi Lithium, which raised US$1.7 billion in July.

Additional upcoming high-profile IPOs include 4Paradigm which is the latest AI company to pursue a Hong Kong listing. The company initially filed for a listing in 2021 to raise up to $500 million but decided to postpone its listing. 4Paradigm provides AI software that allows enterprises to develop their own decision-making AI applications in a range of industries such as banking, insurance, manufacturing, healthcare, retail and agriculture. Asian insurer, FWD Group Holdings Ltd, also recently renewed its filing. The company originally sought to raise about $1 billion in an IPO but has not disclosed the final size and timing of its current IPO.

As Hong Kong moves into its post-pandemic era, the government is taking initiative to revitalize its status as an international financial centre, cultivate fresh talent and ensure it remains an attractive listing destination. Stepping up its role in attracting capital and enhancing its ability to compete with other hubs to lure innovative startups, Hong Kong is reviewing reducing revenue requirements for hard-tech companies to list on the exchange. Following the success of adding the 18A chapter to its main board listing rules in 2018 to allow biotech companies with no revenue or profits to be listed, the HKEX is preparing a new chapter 18C scheme to accommodate companies in sectors ranging from artificial intelligence and chips to autonomous vehicles and smart manufacturing. The specific terms proposed for the companies according to insiders are:

• Firms pre-commercialization: market value requirement for companies at the time of their initial public offering would be more than US$2 billion • Commercialized firms: Revenue requirement would be HK$200 million (US$25 million) to

HK$300 million, versus the current requirement of HK$500 million; market value requirement would be at least US$1 billion Last summer, the city embarked on a new strategy to drive fintech development within Hong Kong over the next three years when it launched “Fintech 2025”. The city’s growing role in the field has already been recognized in the Global Startup Ecosystem: Fintech Report with Hong Kong joining Silicon Valley, New York City, London and Singapore as one of the top five fintech ecosystems. Additionally, the Hong Kong Monetary Authority has moved into the forefront of CBDC innovation as it begins to work with banks and technology firms to test the e-HKD from the fourth quarter and pave the way for a virtual currency the public can use in the future to shop, dine out and make money transfers.

In an effort to provide mainland investors easier access to Hong Kong stocks and widen the Chinese currency’s worldwide usage, the HKEX is launching a system for yuan shares trading for southbound Stock Connect in the first half of 2023. Currently, Mainland China traders face exchange rate risk as trading Hong Kong stocks under the Connect scheme are only traded in Hong Kong dollars.

Despite pressures from its extended rigid quarantine and changing geopolitical landscape, Hong Kong continues to play a pivotal role in bridging East and West. The city remains a critical link between China and the world to facilitate the integration of mainland and foreign capital as well as a destination for the next growth engines and technological innovation. As part of China’s Greater Bay Area along with Macau, and nine cities in Guangdong, it is benefiting from China’s ambitious plan to create a hi-tech economic zone to rival the likes of Silicon Valley. With AR, VR, fintech and metaverse start-ups flourishing in the Hong Kong market, the city is strengthening its position in emerging technologies. Most importantly, Hong Kong is overcoming the current challenges to move into the post-pandemic era which offers a brighter outlook for the city as an international fundraising hub.

Ms. Leslie Richardson has over 20 years of investment management and equity research experience. She operates a boutique investor relations firm in Hong Kong for Asian companies listed in the U.S. and Hong Kong. She also assists private companies develop investment material and build an investor following in preparation for a public listing. Additionally, she is the Asian Correspondent for Micro-Cap Review, www.microcapreview.com, a financial magazine focused on mirco-cap companies. Previously, she worked for CCG Elite in assisting Asian-based, U.S. listed clients formulate key communication strategies. Ms. Richardson began her investment career at U.S. Trust Company then went on to join Odyssey Advisors as a portfolio manager and Director of Research. Ms. Richardson specialized in high growth sectors such as bio-tech, alternative energy, IT and telecommunications. She earned her M.B.A. from the University of Southern California. Ms. Richardson is based in Hong Kong. www.elite-ir.com.