Alibaba secondary listing a rare good-news story for Hong Kong

Alibaba’s co-founder Jack Ma is seen on the screen at the group’s listing ceremony at HKEX on Tuesday

Hong Kong has needed a good-news story for quite a while. The up to $12.9 billion secondary listing of Alibaba won’t bring peace to the streets, but it is a useful illustration of the city’s enduring strength as a financial market.

The Alibaba deal rained accolades. It is the largest equity offering worldwide this year, the largest Hong Kong equity offering since AIA in 2010, and the largest tech follow-on anywhere in the world.

Alibaba becomes the largest market capitalization company listed in Hong Kong.

“It is hugely significant for Hong Kong,” says a source close to the deal. “It has a positive impact on Hong Kong markets and it is a major milestone.”

Of greater significance, though, is that it is the first of a new type of deal called Chapter 19C. This ungainly name refers to new rules from Hong Kong Exchanges and Clearing (HKEX) that came into force last year after much consultation. It allows overseas listed Chinese companies with weighted voting rights to come back and list in Hong Kong.

The rule might as well have been written for Alibaba, and probably was. When Alibaba opted not to list in Hong Kong but New York in the largest IPO of all time in 2014, the decision was partly because New York allowed weighted voting rights in a dual-class listing structure, and Hong Kong did not.

The snub caused a great deal of soul-searching in Hong Kong and eventually a change in the rules.

Tech IPOs

Since then, Hong Kong has attracted new tech IPOs using dual-class structures, notably for Xiaomi and Meituan, but the Alibaba listing will feel like the greatest vindication of a step that involved a notable compromise in governance to avoid being left behind by Chinese tech listings.

The listing makes it easier for Hong Kong to present itself as a suitable venue for tech and new economy companies, whether already listed or private. Hopefully, it will also boost flagging liquidity in Hong Kong: the most liquid stock before the Alibaba secondary is Tencent, Alibaba’s natural contemporary.

Still, the deal should not be given a totally free pass. The weighted voting rights structure allows control of Alibaba to remain with Jack Ma and other managers by giving them a separate class of stock with greater voting rights than those held by ordinary investors.

There is a low correlation between what is happening in Hong Kong versus what is happening in the markets. What’s really driving the secondary markets and equity fundraising windows is much more about global macro factors 

 – Banker

Alibaba is far from alone in this – Google and Facebook do the same – but until a few years ago Hong Kong had been praised for preserving good governance in keeping all shareholders equal in their power.

As Jamie Allen, secretary-general of the Asian Corporate Governance Association, told us last year: “Our feeling now, with the introduction of dual-class shares in particular, is that the issue of fairness is being undermined in Hong Kong.

“There’s clearly a feeling now that better corporate governance doesn’t make a market more competitive.”

That clearly didn’t bother investors. The retail tranche was 42-times covered, triggering a full clawback, meaning that retail alone hold $1.1 billion of stock, also the biggest such allocation since AIA.

The institutional side was well covered, too, with a diverse book in terms of investor type and geography. Of the two joint sponsors, Credit Suisse clearly prioritized international investors and CICC the Chinese, with Citi, JPMorgan and Morgan Stanley one tier down at the global coordinator level.

Streets vs markets

The broader significance of the deal is to illustrate that Hong Kong, at a market level, is still very much open for business, despite unprecedented upheaval on its streets.

In fact, the markets have largely ignored what has been happening locally: the US-China trade war has had a bigger impact on the Hang Seng Index than anything else, and there has been limited outflow of private wealth, for example.

“There is a low correlation between what is happening in Hong Kong versus what is happening in the markets,” says one banker. “What’s really driving the secondary markets and equity fundraising windows is much more about global macro factors.”

However, the escalation of violence in the two weeks before the deal had impacted the local market: retailers and the service sector are being hit by disruption, even if e-commerce players aren’t.

For the deal to be seen as a true success, it needs to attract others to follow suit. There is not a huge number of candidates for 19C issues – it applies only to companies already listed elsewhere, and there are criteria on market capitalization and revenue – but in terms of tech companies more widely, there are plenty to try to attract.

For this, aftermarket performance will be crucial. The deal lists 2.3% of the company – 2.7% if the shoe is exercised – and it remains to be seen how the absorption of that stock affects the share price in Hong Kong and New York.

In the meantime, though, any good news is welcome in Hong Kong.