The trading debut of Xpeng’s US$1.8 billion initial public offering (IPO) in Hong Kong kicked off a day after Beijing announced a new set of rules for companies looking to raise capital on overseas exchanges.
The stock opened on Wednesday 1.8 per cent higher at HK$168 before ending the day flat at its IPO price of HK$165. Xpeng has, however, become the first company with a weighted voting rights (WVRs) structure to choose Hong Kong as its second home jurisdiction in a dual primary listing, setting an example for other similarly structured US-listed Chinese technology companies despite a sell-off in Chinese technology stocks in the city in the aftermath of Beijing’s latest crackdown.
“A dual listing in Hong Kong provides US-listed Chinese issuers with an option to mitigate geopolitical tensions between the US and China,” said Brian Gu, Xpeng’s vice-chairman and president.
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The Xpeng IPO will boost the Hong Kong bourse’s ongoing drive to attract mainland China’s technology innovators through dual primary listings. Reinforcing its role as the fundraising hub helping such mainland companies achieve Chinese President Xi Jinping’s “Made in China 2025” industrial master plan means lucrative business for the Hong Kong stock exchange.
Moreover, Beijing wants home-grown carmakers to command 80 per cent of China’s electric vehicle (EV) market by 2025. And by carrying out its dual primary listing, Guangzhou-based Xpeng has shown other US-listed Chinese EV makers, NIO and Li Auto, how to navigate the new set of listing rules – introduced in April 2018 as part of a sweeping reform by the Hong Kong exchange – to list closer to home and hedge against the risks posed by a worsening US-China technology rivalry.
Xpeng’s Gu, who was the chairman of JPMorgan’s Asia-Pacific Investment Banking business before joining the start-up in March 2018, is no stranger to Nicolas Aguzin, the new CEO of bourse operator Hong Kong Exchanges and Clearing (HKEX), himself a veteran JPMorgan banker. A successful dual primary listing by a Chinese company with WVRs could open the floodgates for the exchange, a win-win outcome for both former bankers.
The local exchange will also benefit from Beijing’s latest crackdown. The shares of Hong Kong Exchanges and Clearing rose 5.3 per cent to HK$$491 on Wednesday, as investors bet on the city Hong Kong benefiting from China’s new listing rules.
Xpeng’s dual primary listing will not only allow it to expand its investor base to mainland China through Hong Kong, it will also subject it to a level of regulatory scrutiny on a par with the US, its first listing location.
To be sure, the EV maker is not the first issuer to conduct a dual primary listing in the city. That honour goes to Nasdaq-listed pharmaceutical company BeiGene, which raised US$903 million in August 2018 in Hong Kong. But Xpeng made use of a new listing chapter introduced in April 2018 specifically designed for WVR companies to complete its dual primary listing.
A WVRs structure confers founders and management of a company with more voting power than general investors. While Alibaba Group Holding, which owns this newspaper, and Baidu also have such structures, both chose a secondary listing in Hong Kong, which exempts issuers from full compliance with the city’s listing rules and but offer a faster route to an IPO and a listing. It would take just three months for a secondary listing issuer from filing an application to listing, compared to an average of 180 to 200 days for a primary listing.
To qualify for a secondary listing, a Chinese issuer needs to have a track record of at least two full financial years of good compliance with a US exchange. Xpeng, which listed on the New York Stock Exchange last August, falls short of that and so a secondary listing was not an option.
And while there is more paperwork involved, the biggest reward for a dual primary listing lies in a potential inclusion into the stock connects, mutual market access mechanisms that allow mainland Chinese investors in Shanghai and Shenzhen to trade Hong Kong stocks, and vice versa.
“If we had qualified for a secondary listing and chosen to list via that avenue, we wouldn’t have been able to capture investors from China,” said Gu, adding that he remained confident that Xpeng’s market capitalisation – HK$280 billion (US$36 billion) at the time of listing based on its IPO offer price of HK$165 – will eventually qualify it for an inclusion.
In September last year, BeiGene was also included in the stock connect, less than a year after its Hong Kong listing. Such inclusion is off-limits to companies listed through a secondary flotation.
Inclusion in the stock connects is significant because, for instance, the average daily trading value of the Shanghai southbound stock connect, which represents flows from mainland investors trading Hong Kong via the Shanghai bourse, totalled HK$13.1 billion last year, rising to HK$16.7 billion in June.
On the downside to a dual primary listing, applicants cannot enjoy a range of automatic waivers available to secondary listing companies. These waivers include, for example, exemption from the need for issuers to establish audit and pay committees, or the need to submit a profit forecast to the exchange during the vetting process.
“The Hong Kong bourse is proven to be the natural choice for homecoming listings. It is expected that more US-listed Chinese companies will follow suit,” Irene Chu, a partner at KPMG, said in a recent report on the global IPO market.
Moreover, all shares listed in Hong Kong are fungible, or interchangeable, with American depositary shares. Such fungibility is off-limits to Chinese exchanges because of China’s capital controls.
For the more than 200 Chinese companies listed in the US, the signing of the Holding Foreign Companies Accountable Act into law has heightened the risk of delisting if they fail to comply with US auditing rules.
“There are still many US-listed Chinese companies that are weighing a plan B to hedge against the risk of delisting,” said Bruce Pang, head of macro, strategy research at China Renaissance. “A dual primary listing represents HKEX’s move to give more options to these companies, to provide a backstop to their existing US investors.”
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