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 initial public offering (IPO) on the Hong Kong Stock Exchange (HKEX) and is seeking to increase US$500 million to US$1 billion.

Mainland China web big Alibaba Group continues to listing its good 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 12 months, according to Bloomberg.

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

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

Unlocking Potential Worth

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

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

Conglomerates with a number of enterprise strains determine the enterprise section with the very best progress potential — typically these are asset-light companies — after which look to listing them individually by means of the spin-off. Via the valuation course of, the market helps understand 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 mother or father firm. In different phrases, the elements come to be value greater than the entire, which completely illustrates the attraction 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 section, when listed on the home A-share market, advantages from larger valuation. In the meantime, the mother or father 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 worth. 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 corporations and the main shareholders.

“Greater than 30 Hong Kong–listed corporations have efficiently landed their enterprise segments on the A-share market by way of 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 progress alternatives, biotechnology corporations typically lack entry to funding throughout their analysis and growth phases. This could depart them pressed for money. The spin-off itemizing opens an unbiased financing channel for the subsidiary. It establishes clearer and extra enticing positioning and offers the mother or father firm added flexibility in its capital operations.

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

Enhancing Operational Effectivity and Competitiveness

Spin-off listings might help corporations reassess their companies in order that each the mother or father firm and the subsidiary can concentrate on their core segments. This, in flip, improves operational effectivity and general competitiveness. As well as, the fairness incentive launched by the spin-off motivates the subsidiary’s administration staff and workers to realize 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 giant, progressive platform corporations. Nonetheless, regulatory safeguards assist strike a steadiness between enhancing Hong Kong SAR’s competitiveness and defending traders.

Hong Kong SAR–listed corporations searching for to spin off their companies into separate listings have to use to the HKEX in accordance with the Itemizing Guidelines Observe Notice 15 (PN15). Tang identifies three key areas that the trade focuses on when reviewing spin-off itemizing purposes:

1. Will the Mum or dad Firm Nonetheless Meet the Itemizing Necessities after the Spin-Off?

The HKEX examines whether or not the mother or father firm will retain enough belongings 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 think about the character of the spin-off enterprise itself, nevertheless it additionally examines how a spin-off itemizing will impression present shareholders. For companies with promising returns, the HKEX focuses on how the mother or father firm can derive business advantages by retaining management over the subsidiary.

3. Will the Spin-Off Be Unbiased from the Mum or dad Firm?

PN15 explicitly requires that newly listed subsidiaries be unbiased from the mother or father firm by way of enterprise, finance, and administrative administration.

“Related transactions between the newly listed subsidiary and the mother or father firm are of explicit concern,” Tang says. “As the 2 change into separate listed entities with their very own shareholders, HKEX should be sure that there aren’t any suspicions of transferring advantages to main shareholders by means of related transactions.”

Proceed with Warning

Corporations searching for to spin off elements of their enterprise into separate listings ought to conduct a complete evaluation 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 think about the potential obstacles {that a} spin-off itemizing might create.

That requires growing 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 interact 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 writer(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 writer’s employer.

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