It is unquestionable that Hong Kong continues to be a gateway to China, and an important hub for global commerce, trade and finance. However, in recent weeks, there has been some debate as to why did the Hong Kong Exchanges & Clearing Ltd. (HKEX) walk away from potential listing talks with one of the most renowned e-commerce websites, Alibaba.com. Have the exchange officials involved in the negotiation talks failed to fully understand Alibaba’s business model, or both parties could not agree on the proposed dual-class shareholding structure that is expected to leave the management executives at Alibaba.com securing control, and HKEX rejected this proposal due to potential bias being shown? Several news reports have emerged in recent days suggesting the latter might be one of the causes for HKEX to walk out of the proposed IPO.
According to a Bloomberg.com news report published on September 26, 2013 that indicate the rate of IPO turnover in Hong Kong, where so far, according to Bloomberg News, approximately USD 7.8 billion were raised in total year-to-date as of June 2013, and was a far cry from the USD 20.0 billion raised during the same period in 2010. Based on the latest financial statements, it showed that listing fees, one of the key revenue metrics for valuation purposes, accounted for approximately 11.0 percent of HKEX’s revenue for the six months ending June 30. The HKEX is balancing the need to maintain tight exchange rules, along with its regulators, while at the same time attract major IPO aspirants to list in the Chinese territory, which has often been seen as a financial trading hub for many Mainland Chinese-listed names. The HKEX is also facing various challenges abroad including the likes of Singapore, Shanghai, Tokyo, Sydney, etc. Incidentally, following the failed negotiations with HKEX, the management of Alibaba.com decided to take the negotiations to New York, and is currently negotiating with officials from New York Stock Exchange (NYSE) and Nasdaq.
The proposed IPO listing by Alibaba.com, which was estimated to worth several hundreds of billions of dollars would have brought in major rewards and boost to HKEX’s image as a major gateway for Asian listings during a year where many global listings have been slow. In a recent news article I have come across, it was reported that the Singapore Exchange Limited or SGX has garnered several IPO listings, including home-grown, and foreign ones, and was placed second only to NYSE amid the lacklustre rate of companies wanting to go public, as the financial markets have experienced several bouts of turmoil, and volatility in recent months, which was deemed to be too much for these IPO aspirants to take on the risk of listing to avoid any potential disappointment, lack of appeal among investors, mainly the institutional and some ‘cornerstone’ investors.
Alibaba.com was said to be one of the most prominent e-commerce websites, and was touted to be one of the largest Mainland Chinese technology firms, second or third to the likes of Tencent Holdings, Sina.com, Baidu.com, etc. The business model which the Company offers is quite similar to Amazon.com, except that its primary market is in the Asia-Pacific region, including China. However, in recent years, many American consumers have also become aware of its e-commerce websites, and affiliates, and have started to turn to some of their sites to shop, and away from the tradition of clicking on their local merchants such as Target, Wal-Mart, JC Penny, Neiman Marcus, etc. This trend also adds to the profile of Alibaba,com as a credible Mainland-run Chinese company, along with its international hardware-maker equivalent, Lenovo. Yahoo! Inc. continues to maintain a small stake in Alibaba, and some of its shareholders included several prominent sovereign wealth funds such as Temasek Holdings, etc. have reportedly own some stakes in the Company as well.
The question remains on future listings in Hong Kong over whether HKEX officials could possibly allow for dual-class shareholding structures in the future as it believes that such a structure might not been seen as investor-oriented as the bourse, like any other bourses in the region, and in the world, operates in a more tightly regulated environment, and would want to remain focused on preserving and upholding the essential values of good corporate governance. In addition, HKEX has also learnt its lessons previously, after its regulators and investors were holding accountable on the executives running the Exchange for failing to prevent past accounting scandals involving Chinese companies from Hontex International Holdings Co. to Boshiwa International Holding Ltd., a maker of children’s apparel and licensee of the Harry Potter brand, which disclosed in March 2012 that Deloitte Touche Tomatsu resigned as its auditor due to the lack of financial information provided by management. Boshiwa had earlier raised approximately USD 321.0 million in a September 2010 IPO, has been suspended from trading in Hong Kong for 18 months. These financial scandals have left a deep ‘scar’ on HKSE, and I believe that the botched talks with management at Alibaba is seen as a precautionary measure taken by HKSE to avoid being caught in another scandal. However, I believe that, amid the walkout by HKSE on the negotiations, it is a tough struggle for those HKEX officials involved in the IPO talks with Alibaba.com, as it has regulatory obligations to meet, while at the same time as a profit-generating entity, it has to fulfil its obligations to shareholders and investors.
In the end, I believe that HKEX did not lose a lot of reputation despite the various backlash from analysts and the larger investor community, as Hong Kong will still remain a favoured destination for IPO listings, particularly with the gradual liberalisation of the Chinese Yuan currency, its highly recognised Yuan trading hub, etc. However, I do think that by missing out of this potential IPO deal with Alibaba.com, there needs to be a serious re-examination of some of rigid listing rules, including the dual-shareholder structure which the bourse might probably revisit for future revisions, so as to maintain its premier status as a global and regional destination for IPO listings.