Hong Kong turmoil may re-route some IPOs to Singapore

As companies rethink fundraising plans in Hong Kong amid anti-government protests, some are said to be exploring Singapore as an alternative listing destination.

Wayne Lee, chief executive officer of issue manager and accredited Catalist sponsor W Capital Markets, said: "As a result of the severe political unrest in Hong Kong, capital flight to safety is expected. Several Singapore companies that were in the midst of preparation to seek a listing in Hong Kong have recently contacted us, exploring a listing on the Singapore Exchange's (SGX) Catalist board instead."

This is especially as the pro-democracy demonstrations in Hong Kong have continued for more than 11 weeks and show no sign of relenting.

Another Catalist sponsor confirms the phenomenon, but declines to elaborate.

Asked whether the diversion in initial public offerings (IPOs) will be temporary or long-term, it says that Hong Kong's unhappiness with China will do little to break the ties that bind the special administrative region to the Motherland.

"More of the parties that we interact with think that there is now a mindset change about Hong Kong's relationship with China - essentially that Hong Kong is increasingly being viewed as being part of China rather than being separate from China. The mindset change is more permanent and will impact decision-making over a longer period of time."

Mr Lee agrees, saying that the political instability threatening Hong Kong's reputation as a safe financial hub and capital outflows stems from long-term political issues which cannot be resolved overnight.

"Therefore, outflow of both financial assets and human capital is expected, especially if it is safer and logical for some ultra high net worth individuals to keep some financial assets out of Hong Kong into Singapore."

There is yet one other reason why Singapore companies may appear to be U-turning to list in home ground rather than in Hong Kong, where liquidity is said to be more abundant and valuations higher.

SAC Capital CEO Ong Hwee Li said the U-turn had started when Hong Kong became more stringent in its approval of foreign companies seeking to list there, due to concerns that these issuers were looking to create shell companies and profit from the sale of such shells shortly after listing.

Since the middle of 2018, the Hong Kong Exchanges and Clearing has proposed a number of new rules to crack down on such back-door listings and related shell companies, including a ban that prohibits listed companies from selling major assets or shareholdings within three years after a change of ownership.

Such back-door listings often become enticing options for poor-quality companies that do not qualify for an IPO on the Hong Kong bourse.

Such a company would get around the authorities by bulking up on shares in a foreign, Hong Kong listed company, gaining control and then selling its major assets to effectively secure listing status without passing through the normal application process.

According to a source, a successfully "sold" shell company could reap as much as S$100 million at the peak, although this value has since come down.

Stefanie Yuen Thio, the joint managing partner of TSMP Law Corporation, adds that she has heard rumblings of investors and IPO aspirants being spooked by the unrest in Hong Kong, with no quick fix resolution in sight.

"The way I see it, Singapore companies that were considering listing in Hong Kong because of its access to China's capital flows, may well think twice. It has always been an uphill battle getting the Hong Kong market excited about a Singapore business that may not be so well-known to Hong Kong investors. The Hong Kong protests may well tip the balance in our favour and convince Singapore companies to come home."

She added that if China chooses to respond to the unrest by deploying economic measures, it could have a painful impact on Hong Kong.

"If China tightens its capital markets, or focuses more on the development of the Shanghai and Shenzhen stock exchanges, Hong Kong will become less enticing as a listing venue," she said.

Another lawyer, who asked not to be named, gave a more nuanced opinion, that Singapore listings also need a prosperous Hong Kong market in order to do well.

"A lot of investors in the placement and institutional tranches in an IPO are based in Hong Kong, and the ability (of Singapore issuers) to visit them in Hong Kong and market to them, has an impact on a listing bound for Singapore," the lawyer said.

"If the advisory is to only travel if essential, then the usual roadshow process of physically meeting investors potentially gets disrupted. So you have to find other ways of having meetings with these investors - calls or video conferences - which may not be so ideal."

Others, such as director of corporate and finance at Drew & Napier Julian Kwek, believe that the appeal of the Hong Kong stock exchange will still hold, given higher valuations there and the easier access to Chinese capital and the Chinese market that it offers.

"For so long as that continues, there will always be interest in the Hong Kong IPO market," he said.

It has been a slow year for IPOs on the Singapore bourse, and sentiment remains muted in the remaining months, in view of the weaker economic outlook and US-China trade war.

Ten IPOs have been completed on the SGX this year, raising about S$2.4 billion through the public and placement modes, versus 15 deals last year that raised a mere S$730 million last year.

Despite this, analysts and bankers say there are still IPO deals in the pipeline from companies preparing to list, but whether or not they can launch this year is uncertain.

The hopefuls include mostly yield play and defensive stocks, especially Reits.

There is a US grocery-anchored necessity-based retail cum self storage Reit sponsored by a joint venture between UOB Global and an American property firm; a couple of obstetrics and gynaecology businesses; local renewable energy firm Sunseap; and a Reit sponsored by Australian property developer Lendlease Group.

Meanwhile, the Hong Kong stock exchange has seen a number of mega IPOs shelved or cancelled this year, including Warburg Pincus-backed logistics real estate platform ESR Cayman's up to US$1.24 billion fundraising in June; Budweiser Brewing Company APAC's up to US$9.8 billion IPO in July; and the latest, the highly anticipated dual listing of Alibaba Group Holding in Hong Kong, in a share sale expected to raise up to US$15 billion.

Market watchers had said that an IPO of the latter at this juncture would be unwise, given current political sensitivities between China and Hong Kong.

SGX has also seen its fair share of IPO deals that slipped through its fingers this year, though none as major as in Hong Kong.

These include drug development firm Cennerv Pharmaceuticals' withdrawal of its IPO application in May due to weak demand; private-school operator KinderWorld's shelving of its IPO plans in July until a "more favourable time"; and Ardmore Medical's similar delay after concerns were raised relating to the death of a patient under the care of founder and chief executive Sean Ng.

Ms Yuen Thio said: "For Singapore, we continue to shine as a Reit listing venue, with several big Reit IPOs this year alone. With the trade tensions between China and the US still simmering, international capital is looking for a neutral haven, whether to park in real estate or in listed securities. While Singapore does not wish for an unstable world economy, our role is to be a safe and well regulated place for investors."