Yum IPO hits the spot as Chinese firms target Hong Kong listings

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For investment bankers in Hong Kong, June 19 will be just another in a long line of very big days. On Friday morning, they will be ushered in, bank by bank, to meet in person – no Zoom meetings here – the senior management of Yum China.

At stake in the city’s latest big-ticket beauty parade is one of a handful of global coordinator spots on Yum’s secondary listing. Bankers tip the Hong Kong sale to raise north of $2 billion, generating millions of dollars in fees.

A spokesman for Goldman Sachs, which is sponsoring the stock sale, declined to comment.

Beijing-based CICC is likely to be named a joint global coordinator, leaving one and possibly two roles on the IPO syndicate up for grabs.

Taken in isolation, the stock offering could be seen as just another sign of the return to form of Hong Kong’s capital markets, as the initial wave of the Covid pandemic ebbs.

But there is more to the sale than meets the eye.

Yum China is one of 138 mainland firms with a primary listing in the United States. Like most of them, the firm, spun off from its US parent Yum! Brands in 2016, is a curious tangle of features.

While its shares trade in New York, its customers, owners and, increasingly, its shareholders, are Chinese individuals and institutions.

The $90 million of net income it posted in the fourth quarter of 2019, on total sales of $2.03 billion, was all generated in the mainland, where it owns the sole franchise rights to KFC, Pizza Hut and Taco Bell.

Not alone

It is far from the only US-listed Chinese firm to target a secondary listing in Hong Kong in recent weeks. On June 11 NetEase, China’s second largest gaming firm, raised $2.7 billion by selling additional stock.

The Hangzhou-based firm was one of first big Chinese technology success stories to sell shares on the Nasdaq, in 2000. It has traded there ever since.

JD.com, another US-listed mainland tech firm, was due to go public in Hong Kong on the morning of Thursday June 18. It raised $3.9 billion after selling 133 million shares to institutional investors, and saw the retail portion of its secondary listing oversubscribed by 177.9 times.

A host of other mainland firms are lining up Hong Kong initial public offerings. WeDoctor, an online medical services provider backed by Tencent Holdings, hopes to go public by October, raising around $900 million.

Tianjin-based China Bohai Bank aims to earn at least $2 billion by selling shares in the last quarter of the year.

This flurry of activity is driven by several factors.

The first is a simple matter of Hong Kong’s resilience. After a woeful first quarter, when activity was culled by Covid, the city’s capital markets have sprung back to life.

In the year to June 17, 51 new listings, including IPOs and secondary offerings, were completed on the Hong Kong Stock Exchange (HKEx), worth $10.52 billion, according to data from Dealogic.

That places the bourse third in the global rankings this year behind only the New York Stock Exchange (28 IPOs, worth $11.7 billion over the same period) and the Nasdaq (57 IPOs, worth $16.94 billion).

It isn’t the first time the city has reacted with alacrity to the threat of pandemic. In 2003 when Sars, a form of coronavirus, cut the economy off at the knees, just $7.4 billion was raised via the primary equity markets. But that number rebounded to $11.5 billion the next year, then to $24.6 billion in 2005, and $41.5 billion in 2006.

A second factor is rising anti-China sentiment in the US. In April, revelations of massive fraud at Luckin Coffee, a Nasdaq-listed cafe chain based in the coastal city of Xiamen, set in train a series of events.First, Nasdaq executives told the US Securities and Exchange Commission it would introduce stricter fund-raising and auditing rules to weed out corrupt or poorly run firms in the listing process. The US Senate then passed a bill designed to force all New York-listed foreign firms to comply with local audit standards.

China saw this as a personal attack. It warned of a mass exodus of mainland firms abandoning the US, to re-list in Hong Kong, Shanghai and Shenzhen.

When NetEase chief executive William Ding praised the HKEx for being a market “in which we share a closer mutual understanding”, it was widely seen as a dig at US regulators.


From Beijing’s view, the listing bill was yet another sign of Sinophobia.

For evidence, it can point to US Treasury department’s decision on January 13 to impose stricter controls on Chinese investments in critical US technology firms.

There is little doubt that in recent years, the US has become “a more insecure place for Chinese firms to operate”, notes Andrew Collier, managing director of Orient Capital Research, which conducts independent research on China.

Andrew Collier, Orient Capital Research 

That leads us to the final factor at work here, one which helps to explain the sudden allure of a secondary stock listing in Greater China.

Ten or 20 years ago, most ambitious Chinese tech firms coveted a US listing above all else. Back then, “there was serious cachet in having a NYSE or Nasdaq stock ticker”, says a Shanghai based investment banker.

US regulators were seen as having an apolitical and even-handed approach to financial malfeasance. By and large, mainland firms could be sure of a higher valuation in New York than they could get in Hong Kong, let alone Shanghai or Shenzhen.

This was helped by specialist New York-focused investors who pored over the results of firms in, say, biotech, artificial intelligence or online travel, listened to what analysts said, and bought and sold accordingly.

There is less respect for the US financial system these days in China 

It was a world away from the bunfight of China, where stock prices soared and slumped, and bourses either gyrated wildly or just sat flat.

But in the eyes of many mainland firms, the shine is definitely off the apple.

“For years, Beijing was proud of its US-listed firms,” says the Shanghai banker. “There was a sense that companies with a US listing were better-run, that they could help modernise the economy. Since the global financial crisis, that’s no longer the case. There is less respect for the US financial system these days in China.”

Star shine

Yet if New York was no longer the ideal listing venue, it wasn’t clear which market could take its place. Over the last year however, Beijing has begun to answer that question by moving with surprising clarity and certainty.

In June 2019, the Star Market, modelled on the Nasdaq, opened for business in Shanghai, with the aim of convincing high-growth firms to opt for an onshore listing. The new market also opened the door to listings by foreign-registered firms; on June 12, 2020, the electric scooter maker Segway-Ninebot won approval to sell shares, aiming to raise at least Rmb2 billion ($282 million).

If successful, it will be the first time a foreign firm with a variable-interest entity structure has sold Chinese depositary receipts in China’s A-share market.

China has back-pedalled everywhere on reforms except in the capital markets, where they’ve accelerated faster and achieved more than anyone expected 

Segway-Ninebot is based in Beijing but registered in the Cayman Islands.

The same day, the securities regulator surprised investors by introducing far-reaching reforms to Shenzhen’s ChiNext.

Under the new rules, all IPOs on China’s other Nasdaq-style growth market will be approved using a registration based system, with daily price limits doubling to 20% – a move the CSRC hopes will lead to a surge of demand for new stocks.

“The country has back-pedalled everywhere on reforms except in the capital markets, where they’ve accelerated faster and achieved more than anyone expected,” says a Hong Kong based fund manager.

Core narrative

If there is a core narrative here, it is of an ambitious country that has belatedly recognised the need to build strong capital markets – and atop those foundations, an efficient economy.

It is also a tale of a country that has begun to turn its back on the US and to seek to build its own sphere of influence closer to home, relying more heavily than ever on its own markets, resources and investors.

China has a long way to go.

Louis Wong, Phillip Capital 

It is unlikely to convince its big offshore-listed firms to pursue a secondary flotation in Shanghai or Shenzhen. But the decision by the likes of NetEase and JD.com to sell new shares in Hong Kong, and of Yum China to choose not to pursue a New York listing, is telling.

Some of these new share sales have been planned for some time, but not all.

“These firms listen to regulators, and what they are hearing – and it’s with a wink and a nudge – is that it’s in their best interests to begin to align themselves more with the mainland,” says one banker.  

Despite the riots of 2019 and the fallout from Beijing imposing a national security law on the city, “Hong Kong is still Hong Kong”, the banker adds. “At the end of the day, it’s a Chinese city – and it will become more so as these big firms move closer to home.

“After all, they are Chinese firms, with Chinese customers and Chinese controlling shareholders. It makes sense for them to be here. This process has only just begun.”

If you don’t act now, you’ll be waiting until September, and who knows what the world will look like then 

What that means for bankers in Hong Kong is a few hectic and hopefully lucrative weeks ahead, followed by – new Covid spikes permitting – a strong end to the year. “We’re going to have a very busy seven months ahead,” says Louis Wong, executive director at Hong Kong fund management company Phillip Capital.

Another source says: “Pick any US-listed [Chinese] firm – they are all candidates to list in Hong Kong. I’ve never seen banks pitch so hard – they are trying to convince everyone. There’s good liquidity, [Hong Kong’s] US dollar peg is safe as houses, and the window to list will stay open for a few weeks.

“If you don’t act now, you’ll be waiting until September, and who knows what the world will look like then.”