Rating Qualities

8
Overview
Background
Well Structured

Going Public Overseas

How to Choose the Right Stock Exchange for Your Company
Guan Qingyou | Zheng He Island WeChat Wemedia Account © 2018

Chinese businesses made their debut on foreign stock exchanges in the 1990s – first, the state-
owned enterprises and then Internet companies including Alibaba, Tencent, and Baidu. Now the
Chinese businesses joining their ranks with initial public offerings (IPOs) are ”new economy”
companies – innovative growth drivers emerging in the technology, transportation and consumer
services sectors. The number of Chinese companies going public in the United States and in Hong
Kong increased notably in 2017–2018. Following 74 IPOs in 2017, multiple high-profile IPOs as of
August 2018 included iQiyi (China’s Netflix), video streaming platform Bilibili, smartphone maker
Xiaomi Technologies,and online shopping platform Pinduoduo. Though many of these companies’
stocks have underperformed, Chinese companies continue to apply to list in Hong Kong and New
York. In this article from finance media Zheng He Island, economist Guan Qingyou explains this
trend and advises Chinese companies on how to choose between the Stock Exchange of Hong
Kong, the New York Stock Exchange, and NASDAQ. getAbstract recommends Guan’s analysis to
anyone who keeps an eye on capital markets.

Take-Aways
• From 2017–2018, an increasing number of Chinese companies are choosing to go public in
Hong Kong or in the United States instead of in China.
• Financial requirements are more relaxed and processing time is faster in the United States and
Hong Kong compared with domestic stock exchanges in Shanghai and Shenzhen.
• There is more money and a wider range of investors in the US and Hong Kong markets.
Chinese companies also want more exposure on the global stage.
• To choose the right foreign market for its initial public offering (IPO), a Chinese company must
assess its potential valuation, financial situation, industry outlook and growth strategy.

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 • The benefits of going public in Hong Kong include better geographic location, shared culture,
lower cost and Chinese brand recognition. The disadvantages include a smaller capital
market compared with the United States, more stringent profit requirements, lower average
valuations and less global exposure.

Summary
In 2017, 50 Chinese companies went public in Hong Kong and 24 went public in the United
States. This is the highest number of Chinese initial public offerings (IPOs) abroad since the
Chinese economy slowed in 2011. Of the Chinese companies trading on foreign stock exchanges,
around 80% are on the Stock Exchange of Hong Kong (HKEX), including big names such
as Tencent, Mengniu Dairy, China Mobile and Geely. Alibaba trades on the New York Stock
Exchange (NYSE), while Jingdong (JD.com) and Baidu trade on NASDAQ. In the past, Chinese
companies have also opted for other foreign stock exchanges including London, Toronto and
Singapore. Some stock exchanges have more stringent IPO requirements than others. They also
operate under different market systems, are subject to various degrees of government control,
attract different types of investors, and vary in the size of the capital market.

“Word is that electric car maker Nio has applied for an IPO with the US Securities and
Exchange Commission and plans to raise $2 billion to go public in 2019. Since Nio was
only founded three years ago and has been in the red since then, it would be highly
unlikely for it to succeed in going public on a Chinese stock market.”

An increasing number of Chinese companies prefer Hong Kong and US stock exchanges over
domestic ones like the Shanghai Stock Exchange and the Shenzhen Stock Exchange. These
domestic stock exchanges have long, tedious application processes that typically take three to four
years to complete. That’s a lifetime for a company eager to raise capital to expand. The turnaround
is much faster in Hong Kong and the United States – typically from six to nine months in the
United States and nine to twelve months in Hong Kong. China’s financial requirements for IPOs
are also stricter. A company needs to have made profit for three consecutive years, and total profit
over the last three years must exceed ¥30 million ($4.4 million). Many companies that seek to
offer an IPO, especially young Internet companies, are unable to satisfy these requirements.

“We feel that spring has come for China’s biotechnology industry. We now have
everything we need for a major growth spurt in this field.” (HKEX chief executive Charles
Li, commenting on relaxed rules for biotech company IPOs)

Chinese companies also want access to the larger US and Hong Kong capital markets. These
mature markets attract global investors, which means more opportunities to fundraise and
increased chances of a higher valuation. The bigger stage also wins brand recognition that could
potentially lead to partnerships and global expansion.

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 “When it comes to choosing a foreign stock exchange for your IPO, you need to make a
comprehensive assessment of your company, taking into account factors such as your
company’s current financial and management situation, capabilities, and long-term
growth strategy.”

Another important reason for listing abroad is the positive influence that foreign markets have on
Chinese companies. Many Chinese companies going public abroad will update and improve their
corporate management structure to be more competitive in the global market. They tend to adopt
higher standards for accounting, legal matters and employee incentive schemes, and this benefits
the company in the long term.

Consider five factors before deciding which foreign stock exchange is the right place for your
company’s IPO:

1. What is the company’s potential valuation and what are the fundraising
capabilities? – How much money a company is able to raise will depend on the market’s
valuation of the company. Historically, American stocks get higher valuations than Hong
Kong stocks. The US market gives higher valuations for companies in energy, real estate,
health and nonessential consumer goods sectors. Hong Kong gives higher valuations for
emerging industries like information technology.
2. Does the stock exchange have industry specific policies that favor your company?
– In its early years, NASDAQ set a lower bar for IPOs than the NYSE to attract innovative
tech companies that couldn’t meet NYSE requirements. In April 2018, HKEX set a policy
allowing biotech companies that aren’t yet profitable to apply for an IPO. Naturally, it is
expected that Chinese biotech companies will flock to HKEX in the coming years.
3. How much money is your company making? – Whether or not a company is profitable
at the time of the IPO isn’t a crucial factor in the US capital market. The company’s future
potential to turn profits matters more. When Chinese web portals Sina, NetEase and Sohu went
public on NASDAQ, none of them were profitable, but their revenues were high. HKEX, on the
other hand, requires a company to be profitable.
4. How much are you willing to spend on the IPO? – Going public on the NYSE is
much more expensive than in Hong Kong. A company that goes public on the NYSE spends
upward of $5 million, which is approximately five times more than a NASDAQ company pays.
The discrepancy between NYSE’s and NASDAQ’s annual fees is even greater. In Hong Kong,
companies spend an average of 20 million HKD ($2.5 million) on the IPO and pay an average
annual fee of 150,000 HKD.
5. How soon do you want the company to go public? – The process is faster in the United
States than in Hong Kong. Generally, the HKEX is better for large, profitable state-owned or
subsidized enterprises. The American stock exchanges are better for companies that have a
longer growth trajectory and are unable to meet financial requirements just yet.

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 About the Author
Guan Qingyou is the chief economist at the Reality Institute of Advanced Finance. He also
serves as the vice president of Minsheng Securities.

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