Ant Group’s IPO ‘hiccup’ and tech sell-off brushed off by investors amid rush to tap into China’s rebounding economy

Chad Bray
·7-min read

The collapse of the world’s largest ever initial public offering by China’s Ant Group is already in the rear-view mirror for investors keen to tap into China, the only major economy on track to grow this year.

Benchmark indices rose in Hong Kong and Shanghai even as financial professionals digested news that regulators had blocked Ant’s nearly US$40 billion IPO on November 3 amid a broader crackdown on technology giants and the super-apps they operate.

Senior deal advisers continued to predict fast-growing mainland Chinese companies will flock to Hong Kong and Shanghai to make their public debuts while investors are still earmarking larger and larger dollops of capital to deploy in China as it opens its gates to foreign investors.

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“What you’ll see is a gradual trend and shift towards listing in Hong Kong or Shanghai. It’s not going to change because of one hiccup,” said Govert Heijboer, co-chief investment officer at Hong Kong-based hedge fund True Partner Capital.

Several large institutional investors had prepared orders worth over a billion US dollars to participate in Ant’s IPO, according to people familiar with the matter, meaning they had missed out on putting the capital to work elsewhere while the listing process was in motion.

However, when Ant and its advisers contacted some of them about the delay, several who were taking part in the Shanghai tranche of the IPO had said that they still wanted to buy yuan-denominated assets and had asked if there were Ant shares they could buy in private markets.

Most investors are calculating that China will continue to develop its capital markets and lessen its companies’ dependence on bank loans, even if there are bumps in the road. In the past 19 months, three major bond index providers have added Chinese government debt to their global indices and China scrapped quotas that limited the amount of foreign capital big institutional investors could pump into Chinese markets.

Broadly speaking, overseas investors are still underweight the world’s second-largest economy and only hold 2.6 per cent of its bonds and 3.8 per cent of its equities.

Foreign investors remain underweight in the world’s second biggest economy and remain committed to investing in China’s rebound from a coronavirus pandemic-induced slowdown. Photo: Reuters
Foreign investors remain underweight in the world’s second biggest economy and remain committed to investing in China’s rebound from a coronavirus pandemic-induced slowdown. Photo: Reuters

To be sure, the collapse of the IPO was a salutary reminder to foreign investors that China’s regulations are evolving to catch up with rapidly-innovating technology, and, while the country’s capital markets are still developing, it will protect the levers of economic policy, including large state-controlled banks.

The Shanghai Stock Exchange said on November 3 it was scuppering Ant’s IPO less than 48 hours ahead of the planned start of trading on November 5 because of new rules for fintech companies. Since then, mainland regulators have mooted anti-monopoly regulation curbing tech platforms’ use of data.

“The most credible explanation is that the authorities became cognisant of the macro risks when it was almost too late; in other words, they lacked the manpower to recognise the problem in time,” Bo Zhuang and Eleanor Olcott of research firm TS Lombard said in a note to investors on Thursday.

The clampdown prompted a sell-off in the tech sector, while downbeaten bank, airline and tourism stocks led a broader rally on positive news about a potential vaccine for Covid-19, the disease caused by the coronavirus.

Sharp regulatory reversals have crushed emerging industries in China before, and wiped out investors’ profits, as happened with peer-to-peer (P2P) lending in 2016.

“It feels very ad hoc, and no business or investor can survive and plan in an ad hoc regulatory environment,” said Howard Yu, a professor at Switzerland’s IMD Business School who studies China’s internet giants.

That being said, China’s technology platforms have shown they can adapt and grow on shifting sands. After the 2016 P2P purge, fintech giant Lufax shed its operations in the field and raised about US$2.4 billion in a New York listing on October 30.

A critical part of China’s financial development policy will be supporting Hong Kong and Shanghai as financial hubs and convincing technology unicorns to list closer to home, rather than seek an investor base in the United States.

Ant Group suspended its initial public offerings less than 48 hours before its highly anticipated dual debut in Shanghai and in Hong Kong this month. Photo: Edmond So
Ant Group suspended its initial public offerings less than 48 hours before its highly anticipated dual debut in Shanghai and in Hong Kong this month. Photo: Edmond So

In some ways China is singing to the choir, as companies are keen to be close to their customers, suppliers and investors who understand their business models.

“Typically, companies want to list in their home jurisdiction, which also happens to be the world’s second-largest economy, so Hong Kong, Shanghai and Shenzhen are the obvious choices,” said Victoria Lloyd, a partner at law firm Ropes & Gray. Lloyd is also a member of the listing committee at Hong Kong’s stock exchange.

Hong Kong’s stock exchange continues to reform to attract new-economy companies, including widening the cohort of companies it accepts with weighted voting rights. Since November of last year, Chinese technology giants Alibaba Group Holding, JD.com and NetEase have all taken advantage of the rules changes with secondary listings in Hong Kong.

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The top 20 IPOs in the past three years are contributing about 20 per cent of the Hong Kong exchange’s average daily trading volume, said Christina Bao, deputy head of market development at Hong Kong Exchanges and Clearing, which operates the city’s stock exchange.

The Shanghai Stock Exchange’s 15-month-old Star Market was set to eclipse the New York Stock Exchange in terms of capital raised this year if Ant’s nearly US$40 billion IPO had gone forward. Photo: AFP
The Shanghai Stock Exchange’s 15-month-old Star Market was set to eclipse the New York Stock Exchange in terms of capital raised this year if Ant’s nearly US$40 billion IPO had gone forward. Photo: AFP

Shanghai launched the Star Market last year at the behest of President Xi Jinping as China’s answer to the technology-heavy Nasdaq in the United States.

Through October 31, the Star Market attracted 119 new listings, which raised a combined US$23.3 billion this year, according to data from Refinitiv. It was the fourth largest venue for IPOs this year behind Nasdaq, the Hong Kong stock exchange and the NYSE.

If Ant’s dual Hong Kong and Star Market IPO had gone ahead, the Star Market would have eclipsed the 228-year-old New York Stock Exchange in terms of capital raised for debutants this year.

While the suspension of Ant’s IPO leaves a US$34.4 billion hole in expected funds raised across the exchanges, people familiar with the situation have said that Ant is likely to revive its listing plan in a few months’ time when it has figured out how to adjust its business model to be compliant with new rules.

Ant Group’s dual listing in Hong Kong and in Shanghai was expected to be the biggest IPO ever on record. Photo: AP
Ant Group’s dual listing in Hong Kong and in Shanghai was expected to be the biggest IPO ever on record. Photo: AP

Charles Li Xiaojia, CEO of Hong Kong Exchanges and Clearing (HKEX), which operates the city’s stock exchange, put a brave face on the miss and said the suspension of Ant’s IPO will prove to be the right decision for the company, the market and ultimately for investors as everyone needs time to understand the new regulatory rules.

“I think the Hong Kong stock exchange and the Shanghai stock market are catching up very quickly [with New York],” said Paul Go, senior partner and global IPO leader for Asia-Pacific at EY Private Assurance, during a conference organised by the Post on Thursday called “Can Hong Kong’s IPO market maintain its momentum?”

In 2021, China’s economy is expected to expand by 8.2 per cent – the second highest after India globally, according to the International Monetary Fund. Goldman Sachs expects China’s economy to grow by 2 per cent this year and 7.5 per cent next year, driven by an increase in domestic consumption.

“Where you have domestic growth and consumption growth, I think investors are still very keen to have exposure to that in China,” said Lorraine Tan, director of equity research at Morningstar. “I don’t think it will necessarily dent the appetite for the IPOs that come out in that space. It just makes people a little more wary of the valuation and market position.”

Amy Lo, co-head of UBS Wealth Management for Asia-Pacific and head of its Hong Kong branch, declined to discuss Ant, but said capital raising by mainland firms and investor appetite remain high in Hong Kong.

“Our investment bank is really very, very busy,” Lo said. “Notwithstanding some of these isolated incidents, there is still a strong IPO pipeline.”

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