Hong Kong Buoyed by China’s IPO Freeze as Alibaba Eyes U.S.

Hong Kong, recovering from the weakest market for initial public offerings in almost a decade, is getting a much-needed boost from an unlikely source -- China’s securities watchdog.

China’s 14-month freeze on domestic IPOs is driving mainland companies in search of capital to go public in the former British colony instead. More than $5 billion of deals originally planned for China have been moved to Hong Kong since September 2012, ranging from port operators to car dealers and apparel makers, based on estimates from bankers who spoke on condition of anonymity.

That’s an amount equal to more than 40 percent of the $11.4 billion of IPOs in Hong Kong this year, data compiled by Bloomberg show. The migration is likely to continue as more than 700 companies are waiting for permission to go public on the mainland, giving the city a cushion should it lose the IPO of Alibaba Group Holding Ltd., potentially the world’s biggest since Facebook Inc.

“Companies brought over from mainland China will be a major source of listings for Hong Kong in the near future,” said Ronald Wan, chief China adviser at Asian Capital Holdings Ltd. “Losing Alibaba would weigh on the global ranking of Hong Kong’s stock exchange.”

The China Securities Regulatory Commission hasn’t approved any IPOs in Shanghai or Shenzhen since September 2012, as it drafts rules to curb misconduct in first-time share sales. The CSRC said Sept. 27 that offerings will resume after the new regulations are announced, without giving a time frame.

Regulator’s List

The freeze has led bankers at Goldman Sachs Group Inc., Morgan Stanley, Deutsche Bank AG and JPMorgan Chase & Co. to search for prospects among the more than 700 companies listed on the CSRC website that had filed for IPOs on the mainland, people familiar with the matter said.

China Grand Automotive Services Co., the car dealer backed by private-equity firm TPG Capital, is one example. The Shanghai-based company decided this year to go public in Hong Kong after waiting since 2010 for permission for a mainland IPO, said a person familiar with the matter who asked not to be identified.

China Grand Auto is working with Goldman Sachs and China International Capital Corp. and plans to seek at least $500 million in the first half of next year, the person said.

Surging Inquiries

Qinhuangdao Port Co., China’s biggest coal port, is preparing a $700 million IPO in Hong Kong that may start this month after waiting more than 18 months for approval to sell shares on the mainland, said people with knowledge of the matter.

Bank of Chongqing Co., a lender based in China’s most populous city, raised $548 million in a Hong Kong IPO in October after shelving its domestic listing plan. It shares have fallen 2.3 percent since they started trading.

Inquiries on how to move an IPO to Hong Kong from China’s mainland have surged recently, said Ronald Yam, vice president for Greater China at accounting group CPA Australia. He’s made five trips to meet Chinese companies considering such moves in the past three months.

Stock exchanges compete for listings mainly for the revenue from fees on their stock trades. Listing fees accounted for just 11 percent of Hong Kong Exchanges & Clearing Ltd.’s HK$4.44 billion ($573 million) of revenue in the six months to June 30. The bourse gets the bulk of its revenue from stock-trading fees.

Global Ranking

Hong Kong led all exchanges with almost $53 billion of first-time sales in 2010, 26 percent more than the amount raised on the New York Stock Exchange, data compiled by Bloomberg show. This year, Hong Kong ranks fourth among global bourses, hurt by the city’s languishing benchmark stock index and the absence of giant IPOs like the sale of AIA Group Ltd.

Even so, deals have rebounded from last year’s $8 billion, which was the least since 2003.

The freeze isn’t the only driver of Hong Kong IPOs. The CSRC in January eliminated 13-year-old rules that required firms to reach a certain size before being permitted to apply for overseas sales. Companies must now only meet local standards in markets where they seek to sell shares, making it easier for mainland companies to go public elsewhere.

Alibaba Blow

The flow of IPOs previously bound for Shanghai or Shenzhen will help soften the blow from a possible decision by Alibaba, China’s largest e-commerce company, to eschew Hong Kong in favor for going public in the U.S., said Josef Schuster, the founder of IPOX Schuster LLC, an investment firm based in Chicago with about $1.9 billion under management.

An Alibaba IPO could raise almost $13 billion, Ernst & Young estimates. Hong Kong hasn’t hosted a sale of that size since 2010.

Discussions between Alibaba and Hong Kong’s bourse broke down in September over the company’s proposal for a partnership structure that would let members of senior management control a majority of board nominations.

Unlike the U.S., Hong Kong prohibits IPOs with different classes of shares, a structure that’s been used by companies such as Facebook to keep founders in control. Alibaba’s proposal does not include using different share classes, and it has been accepted by the New York Stock Exchange and the Nasdaq Stock Market, a person with knowledge of the matter said.

Stance Softening

Alibaba spokesman John Spelich said the company hasn’t set a timetable for an IPO, hired underwriters or picked a venue.

There are indications that Hong Kong may be softening its stance. The stock exchange is laying the groundwork for possible public consultation on different shareholding structures, spokeswoman Lorraine Chan said Oct. 30.

“I speculate that Alibaba is going to make a U-turn and will compromise to have a primary Hong Kong listing,” said Schuster. “If not, Hong Kong still has a steady and growing stream of IPOs coming from the mainland.”

The following companies are among those that have moved IPOs to Hong Kong from the mainland:

Company                              IPO Size
China Grand Auto Services Co.        $500 million
Qinhuangdao Port Co.                 $700 million
Shanghai La Chapelle Fashion Co.     $600 million
Suzhou Snail Digital Technology Co.  $100 million
Beijing Automotive Group Co.         $1 billion
Qingdao Port Co.                     $500 million
Bank of Chongqing Co.                $548 million (completed)
Huishang Bank Corp.                  $1.2 billion (completed)