There will likely be quite a lot of activity within the capital markets within the Hong Kong Special Administrative Region in 2024.
Mixue Bingcheng, the most important freshly made bubble tea chain in mainland China, applied Initial public offering (IPO) on the Hong Kong Stock Exchange (HKEX) and desires to lift $500 to $1 billion.
Mainland Chinese web giant Alibaba Group continues to list its intelligent logistics arm Cainiao on the HKEX. This is the primary spin-off listing with a complete value of greater than $1 billion since August 2022 and may very well be amongst the most popular IPOs in Asia this 12 months. in response to Bloomberg.
In fact, Alibaba Group is neither the primary nor likely the last to have interaction in spin-offs of subsidiaries and subsequent IPOs. From 2018 to August 2022, 664 corporations within the Hong Kong SAR went public, and of those, 64, or nearly 10%, went public through spin-off listings.
Unlock potential value
So many listed corporations are all in favour of spin-off IPOs within the Hong Kong SAR because they supply value to shareholders.
“One of the most attractive aspects of spin-off listings is the ability to unlock the potential value of related – sometimes secondary – companies and maximize shareholder value,” says Tang.
Multi-business conglomerates discover the business segment with the very best growth potential – often these are asset-light corporations – after which try and list them individually through spin-offs. Through the valuation process, the market helps recognize the potential value of those corporations.
Sometimes the spin-off ends in an interesting phenomenon where the market capitalization of the spun-off subsidiaries exceeds that of the parent company on account of higher price-to-earnings (P/E) ratios. In other words: the parts are price greater than the entire, which perfectly illustrates the attractiveness of spin-off offers.
The same rationale applies to spin-off listings on the A-share market in mainland China. These are concept values which are in high demand or emerging industries. The same business segment advantages from a better valuation when listed on the domestic A-share market. In the meantime, the parent company retains ownership and control of the newly listed subsidiary, shares the industrial advantages arising from the listing, and continues to drive up its own stock price. In the case of Alibaba, the group retains ownership of over 50% of Cainiao shares. This win-win scenario is attractive for each listed corporations and major shareholders.
“More than 30 Hong Kong-listed companies have successfully landed their business segments on the A-share market via spin-off listings since 2018,” Tang said.
Diversification of financing channels
Spin-off listings also help diversify an organization’s financing channels. For example, despite enormous growth opportunities, biotechnology corporations often shouldn’t have access to financing during their research and development phase. This can result in them becoming cash-strapped. The spin-off will open up an independent financing channel for the subsidiary. It ensures a clearer and more attractive positioning and provides the parent company more flexibility in its capital transactions.
According to Tang, having each onshore and offshore financing channels is a giant advantage. “The effect of diversification is particularly evident when the group has independent financing platforms both domestically and internationally,” he says. “It helps mitigate the impact of individual market volatilities on the group’s overall financing ability and resilience.”
Improving operational efficiency and competitiveness
Spin-off listings may help corporations re-evaluate their business, allowing each the parent company and the subsidiary to deal with their core segments. This, in turn, improves operational efficiency and overall competitiveness. In addition, the equity incentive introduced by the spin-off motivates the subsidiary’s management and employees to perform higher.
Make the Hong Kong Special Administrative Region a capital raising hub
For the Hong Kong Special Administrative Region specifically, the emergence of spin-off exchanges has increased competitiveness by increasing the number of latest economy stock exchanges, particularly large, progressive platform corporations. However, regulatory safeguards help strike a balance between improving the competitiveness of the HKSAR and protecting investors.
Companies listed within the Hong Kong SAR that want to spin off their businesses into separate listings must apply to the HKEX in accordance with Listing Rules Practice Note 15 (PN15). Tang identifies three key areas that the exchange focuses on when considering spin-off listing applications:
1. Does the parent company proceed to fulfill the listing requirements after the spin-off?
The HKEX checks whether the parent company has sufficient assets after the spin-off and whether the remaining company meets the listing criteria when it comes to profitability and market capitalization, amongst other things.
2. Does the spin-off listing reflect the interests of current shareholders?
HKEX not only takes under consideration the character of the spin-off business itself, But it is going to also examine how a spin-off listing will affect existing shareholders. For corporations with promising returns, the HKEX focuses on how the parent company can achieve industrial advantages by maintaining control of the subsidiary.
3. Will the spin-off occur independently of the parent company?
PN15 specifically requires that newly listed subsidiaries be independent of the parent company with respect to business, financial and administrative management.
“Of particular concern are the related transactions between the newly listed subsidiary and the parent company,” says Tang. “As the 2 develop into separate listed corporations with their very own shareholders, HKEX must be sure that there isn’t a suspicion that related transactions will transfer advantages to major shareholders develop into.”
Proceed with caution
Companies wishing to spin off parts of their business into separate IPOs should perform a comprehensive review beforehand. They should analyze the market sentiment in addition to the dimensions of the deal and its potential impact on the diversification of their business. You also needs to consider the potential obstacles that a spin-off listing could pose.
This requires the event of a concrete strategy and long-term plan that takes under consideration the principles established by the HKEX. If the spin-off requires restructuring, corporations should contact the relevant intermediaries at an early stage to make sure a smooth IPO.
Photo credit: ©Getty Images / Witthaya Prasongsin
