Hong Kong wants to win next Alibaba with exchange revamp

Bloomberg

Hong Kong Exchanges & Clearing Ltd. is sending a message to startup companies the world over: We want your business. The bourse operator proposed the creation of a new exchange that would allow firms to list before they’ve made a profit and permit dual-class shares, an issue that caused Hong Kong to miss out on Alibaba Group Holding Ltd.’s $25 billion initial public offering.
While small-cap trading in the former British colony has for years been plagued by wild price swings and low volume, a third venue would be a chance to compete with international rivals for blockbuster listings such as Ant Financial, Alibaba’s finance affiliate.
In an environment where multiple share classes are becoming more common, HKEX’s plans are an attempt to broaden the types of stocks it can attract. Chief Executive Officer Charles Li said that Hong Kong has missed out on $50 billion of offerings from mainland companies that either chose the US, where dual-class share structures are allowed, or listed in China at a so-called pre-profit stage.
“We want to find ways to make sure we can continue to enhance Hong Kong’s competitiveness as a global financial center, attract high-growth new economy companies, diversify our markets, develop Hong Kong’s new tech ecosystem and generate new additional tax revenue from trading for our government,” Li said at a media event after the proposals were published.
Pre-profit firms made up 68 percent of new listings in the US last year, according to HKEX. The bourse will differentiate who can buy certain stocks on the new venue, with shares of companies available to individual investors forced to meet higher regulatory standards.
Appealing to companies that use multiple share classes or want to list before they’ve shown a profit “is necessary to help address the lack of growth exposures in our market, and to maintain our competitiveness as an IPO venue,” HKEX said in its proposal.
HKEX shares were up on Monday, gaining 2.2 percent at 9:40 a.m. local time. The plans also suggest waiving rules that prevent Chinese companies that have gone public overseas from listing in Hong Kong. In recent years mainland firms including Alibaba, Weibo Corp. and Baidu Inc. have chosen to have their shares traded in New York.
“It’s not a bad thing at all because you can attract companies like Alibaba,” said Dickie Wong, executive director of research at Kingston Securities Ltd. “But such companies — will they list on the third board in Hong Kong when they can list on the main board in Nasdaq?”

TROUBLED VENUE
The proposals also addressed the city’s second venue, the Growth Enterprise Market. Plans include increasing the market capitalization of companies before they can list and raising cash flow requirements for IPOs.
Controlling shareholders in Hong Kong will be unable to sell below their controlling stake within two years of debuting, while at least 10 percent of new GEM IPO shares must be issued to the public, HKEX proposed. Applicants from GEM hoping to move to the city’s main exchange will face tougher rules, requiring a sponsor and submission of a prospectus.