Mike Tang, CFA, CPA, on Spin-Off Listings in Hong Kong SAR

Capital markets in Hong Kong SAR are buzzing with exercise in 2024.

Mainland China’s largest freshly made bubble tea chain, Mixue Bingcheng, utilized for an preliminary public providing (IPO) on the Hong Kong Inventory Change (HKEX) and is seeking to increase US$500 million to US$1 billion.

Mainland China web big Alibaba Group continues to checklist its sensible logistics arm Cainiao on the HKEX. That is the primary spin-off itemizing totaling greater than US$1 billion since August 2022 and might be among the many hottest IPOs in Asia this yr, in accordance with Bloomberg.

In actual fact, Alibaba Group is neither the primary nor possible the final to have interaction in subsidiary spin-offs and subsequent IPOs. From 2018 to August 2022, 664 firms IPOed in Hong Kong SAR, and of those, 64, or nearly 10%, went public via spin-off listings.

So, what’s behind the enchantment of spin-offs normally and in Mainland China and Hong Kong SAR, particularly? I sat down with KPMG accomplice Mike Tang, CFA, CPA, for his perspective. A full video of our dialog is offered in Cantonese and Mandarin.

Unlocking Potential Worth

So many listed firms are eager on spin-off IPOs in Hong Kong SAR as a result of they ship worth to shareholders.

“One of the vital enticing features of spin-off listings lies within the capability to unlock the potential worth of associated — generally secondary — companies and maximize shareholder worth,” Tang says.

Conglomerates with a number of enterprise traces establish the enterprise phase with the very best development potential — usually these are asset-light companies — after which look to checklist them individually via the spin-off. By the valuation course of, the market helps notice the potential worth of those companies.

Generally the spin-off results in an fascinating phenomenon whereby the market capitalization of the spin-off subsidiaries, as a consequence of larger price-to-earnings (PE) ratios, surpasses that of the mum or dad firm. In different phrases, the components come to be price greater than the entire, which completely illustrates the enchantment of spin-off listings.

The identical rationale applies to spin-off listings on the A-share market in Mainland China. These contain extremely sought-after idea shares or rising industries. The identical enterprise phase, when listed on the home A-share market, advantages from larger valuation. In the meantime, the mum or dad firm retains its possession and management over the newly listed subsidiary, sharing the business advantages introduced by the itemizing and additional driving up its personal inventory value. Within the case of Alibaba, the group retains possession of over 50% of Cainiao’s shares. This win–win situation appeals to each the listed firms and the most important shareholders.

“Greater than 30 Hong Kong–listed firms have efficiently landed their enterprise segments on the A-share market through spin-off listings since 2018,” Tang says.

Diversifying Financing Channels 

Spin-off listings additionally assist diversify an organization’s financing channels. For instance, even with immense development alternatives, biotechnology firms usually lack entry to funding throughout their analysis and improvement levels. This will depart them pressed for money. The spin-off itemizing opens an impartial financing channel for the subsidiary. It establishes clearer and extra enticing positioning and offers the mum or dad firm added flexibility in its capital operations.

Having each onshore and offshore financing channels is a big profit, in accordance with Tang. “The impact of diversification is particularly evident when the group has impartial financing platforms each domestically and internationally,” he says. “It helps mitigate the impacts of particular person market volatilities on the group’s total financing capabilities and resilience.”

Enhancing Operational Effectivity and Competitiveness 

Spin-off listings might help firms reassess their companies in order that each the mum or dad firm and the subsidiary can concentrate on their core segments. This, in flip, improves operational effectivity and total competitiveness. As well as, the fairness incentive launched by the spin-off motivates the subsidiary’s administration workforce and staff to attain higher efficiency. 

Making Hong Kong SAR a Capital-Elevating Hub 

For Hong Kong SAR particularly, the emergence of spin-off listings has boosted its competitiveness by rising the variety of new economic system listings, particularly massive, progressive platform firms. Nevertheless, regulatory safeguards assist strike a stability between enhancing Hong Kong SAR’s competitiveness and defending buyers.

Hong Kong SAR–listed firms in search of to spin off their companies into separate listings have to use to the HKEX in accordance with the Itemizing Guidelines Follow Be aware 15 (PN15). Tang identifies three key areas that the trade focuses on when reviewing spin-off itemizing functions: 

1. Will the Dad or mum Firm Nonetheless Meet the Itemizing Necessities after the Spin-Off? 

The HKEX examines whether or not the mum or dad firm will retain adequate property post-spin-off and whether or not the remaining enterprise will conform to the trade’s itemizing standards round profitability and market capitalization, amongst different necessities.

2. Does the Spin-Off Itemizing Serve the Pursuits of Present Shareholders? 

Not solely does HKEX contemplate the character of the spin-off enterprise itself, nevertheless it additionally examines how a spin-off itemizing will influence present shareholders. For companies with promising returns, the HKEX focuses on how the mum or dad firm can derive business advantages by retaining management over the subsidiary. 

3. Will the Spin-Off Be Impartial from the Dad or mum Firm? 

PN15 explicitly requires that newly listed subsidiaries be impartial from the mum or dad firm by way of enterprise, finance, and administrative administration.

“Related transactions between the newly listed subsidiary and the mum or dad firm are of explicit concern,” Tang says. “As the 2 turn out to be separate listed entities with their very own shareholders, HKEX must ensure there aren’t any suspicions of transferring advantages to main shareholders via related transactions.” 

Proceed with Warning 

Firms in search of to spin off components of their enterprise into separate listings ought to conduct a complete assessment beforehand. They need to analyze market sentiment in addition to the scope of the deal and what it could imply for the diversification of their enterprise. They need to additionally contemplate the potential obstacles {that a} spin-off itemizing may create.

That requires creating a concrete technique and a long-term plan that takes under consideration the rules that the HKEX laid out. If the spin-off necessitates restructuring, the businesses ought to have interaction with the related intermediaries early on to make sure a clean itemizing course of.

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All posts are the opinion of the creator(s). As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the creator’s employer.

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