New tools may expand IPO market in HK

The adoption of publicly traded companies created for the purpose of acquiring or merging with an existing company could further advance Hong Kong's initial public offering market, industry experts said.

It also could forge a regional hub for those entities, known as special purpose acquisition companies, they said.

The city's IPO market boomed in the first quarter of this year as both the number of new share listings and the total amount of fundraising hit a record high, pushing the main board of Hong Kong Exchanges and Clearing Limited to the second place in the global IPO ranking.

About 32 IPOs raised a massive HK$132.8 billion ($17 billion) in the first three months, up 842 percent year-on-year. Analysts expect the strong momentum to continue in the second quarter as many mainland firms are seeking to debut on the Hong Kong stock market.

The 14th Five-Year Plan (2021-25), which sets out the nation's vision for social and economic development, also pledged to continue consolidating the city's strengths as a world-renowned financial center.

A new incentive is that the bourse is mulling over more suitable listing regimens, including the popular listing for special purpose acquisition companies.

Such companies often are set up by well-known financiers with the intention of merging with an unlisted firm, which can go public through a reverse merger to skip the typical IPO process. A reverse merger is when a private company acquires a public company.

The model has been popular in US market and has drawn the attention of many Asian investors. Some Hong Kong tycoons are listing their financing overseas, and Singapore Exchange Ltd is also racing to explore ways to allow the special purpose companies.

Bruce Pang, the Hong Kong-based head of macro and strategy research at China Renaissance Securities, said the special companies might be one of the popular listing options for startups and IPO-ready, high-value companies in high-growth sectors such as technology, healthcare and fintech, giving a faster, more flexible and lower-cost way to raise funds with shorter listing timelines than a traditional IPO.

As Hong Kong ups the ante in the rivalry with its US counterparts for global capital and promising companies, Shenzhen-based Guosen Securities deemed the special companies a "breakthrough point" where Hong Kong could make a difference.

The adoption of such companies stands as a "strategic move" for the Hong Kong exchange to lure qualified asset managers and lock up their potential takeover targets in an indirect manner, essentially putting the bourse ahead of the pack and laying the foundation for its international ambitions, Guosen Securities said in its report.

Regulatory uncertainties remain one of the major concerns of adopting special purpose acquisition companies in Asia. Pang said the expectation is the exchange will embrace the special companies at a gradual and measured pace, considering the bourse's tightening rules on shell activities and backdoor listings, which are vehicles similar to special companies that may also allow circumvention of IPO scrutiny and regulatory oversight.

"For HKEx (the Hong Kong Stock Exchange), it is all about striking a delicate balance between potentially huge opportunities from SPACs and intense regulatory focus," Pang said.

As the exchange looks to jump in on special company IPO fever in Asia, Hong Kong, which has become the second top destination for the special companies globally, has all the elements required to be the best candidate of an Asia-Pacific special company hub. That is especially so considering its diverse and liquid IPO market with considerable listing volumes on par with peers in New York and London as well as a deep investor mix and sector expertise that may help in boosting listed entities' attractiveness, he said.

Pang said the financial hub also enjoys geographical advantages to embrace the booming opportunities in the Chinese mainland and Southeast Asian nations－regions rich with high-growth tech companies as potential targets of the special companies. Discussions and consultation to allow special company listings are already happening.

Sun Xiaotian, an analyst at Hong Kong-based brokerage firm Futu Securities, said if such special companies in Hong Kong present strong development momentum, they will attract more mainland interests from a wide range of business sectors to participate, such as venture capital institutions and industry heavyweights.

Considering mainland retail investors have years of experience in the Hong Kong IPO market and have established relatively mature evaluation systems for new listings' quality and prospects, Sun said they would seek special companies that are set up by well-known and powerful initiating interests.