Hang on

Hong Kong Might Get Aramco. Could It Keep It?

The slow death of previous overseas listings is a cautionary tale.
Updated on
Kostas Tsironis/Bloomberg

Was there ever really an Asian contender apart from Hong Kong to host Saudi Arabian Oil Co.'s IPO? Unlikely. The challenge for the world's largest oil company, if it lists in the territory, will be keeping investors interested once trading starts.

Saudi Arabia has shortlisted the city, along with London and New York, for the international portion of a potential Aramco listing, Reuters reported, with the main float slated for Riyadh.

As the world's largest IPO venue, New York makes sense. London is logical as the center of global commodity trading. Hong Kong, while down in the rankings for global listings, remains a large source of cash.

Big Apple

New York was the top venue for funds raised in IPOs in 2017; Hong Kong was fourth

Source: Bloomberg

No one really thought Singapore, with its lower liquidity, or Tokyo, which has lost a series of foreign listings in recent years, stood much chance. The Toronto Stock Exchange was also an outside contender, despite its many domestic and international oil and gas listings.

There would be few strings attached to a Hong Kong listing, though Aramco wouldn't qualify for dual-class status in the city (if it sought it), as it's not an "innovative" company.

In contrast, a New York Stock Exchange listing would carry the risk for Saudi Arabia of lawsuits related to the 2001 terrorist attacks. And London's smaller time difference with Tadawul, the Saudi exchange, might mean U.K. trading would cannibalize the liquidity the Riyadh bourse needs.

Hong Kong could be a more relaxed host. Investors in the city, accustomed to the vagaries of China's state-owned companies, are less likely to revolt over Saudi decisions like boosting Aramco pay, for example.

The city has an army of IPO-hungry investors and trades many oil-hungry Chinese companies. It also has formal links with the Shanghai and Shenzhen stock exchanges that let Chinese investors buy shares in Hong Kong, as well as big mainland institutions that are active outside the Connect pipes.

If Hong Kong succeeds in launching a "primary connect" link for IPOs, mainland investors would be able to buy into an Aramco offering directly, adding even more demand.

The challenges for Aramco are that it's not Chinese and isn't in the sexy tech or healthcare industries. Even China-run companies that launch Hong Kong IPOs have had to sell chunks to government-backed peers to ensure a successful float. The only notable listings without cornerstone investors last year were China Literature Ltd. (backed by Tencent Holdings Ltd.) and Wuxi Biologics Cayman Inc.

Being an exotic foreigner doesn't help: Glencore Plc and Vale SA are two examples of big names on the world stage that exited their secondary listings in the city after years of desultory trading. Low volumes for Russia's United Co. Rusal Plc, which has its primary listing in Hong Kong, show that commodities aren't a favored play. 

Even those Connect links could disappoint, unless Aramco proves generous with dividends. The top foreign company traded "southbound" is HSBC Holdings Plc, notable for its payouts.

China Play

Just one day's buying of Hong Kong stocks through the trading link with Shanghai shows that apart from HSBC, mainland firms are most in favor

Source: Bloomberg

Note: Data for trading southbound on the Shanghai-Hong Kong Connect on Jan. 11.

Aramco's heft will ensure investors pile in and perhaps give the company the valuation of as much as $1.5 trillion that bankers are promising Crown Prince Mohammed bin Salman. Just 5 percent of a $1 trillion valuation, the low end of what analysts expect, would make this the world's biggest IPO at $50 billion, stealing that crown from Alibaba Group Holding Ltd. 

It's the aftermath that's the problem, in all three trading centers. In Hong Kong, Aramco runs the risk of a slow death.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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