Likely uplift

The potential influx of southbound buying following the inclusion of leading mainland companies' shares in the Stock Connect program between Hong Kong and the Shanghai and Shenzhen bourses could give the market a timely boost.

Global investment bank Goldman Sachs expects the inflow of southbound funds to reach $30 billion should Alibaba and 14 other secondary-listed mainland companies in Hong Kong opt for a dual primary listing.

These funds would be opportune as Hong Kong's capital market — one of the financial hub's key pillars — has borne the brunt of regulatory scrutiny and global recessionary woes in the past few years, leaving investors out of pocket and fundraising slowed.

According to financial analytics firm Dealogic, among the 132 IPOs and secondary listings on Hong Kong's stock exchange since the start of 2021, which raised a total of $47.6 billion, 111 of the companies' shares are currently trading below their respective initial selling prices. So far this year, the benchmark Hang Seng Index has shed 15.5 percent, led by a drop of 26.1 percent in the tech sector.

The emerging primary listing trend would also be timely as mainland investors look for ways to diversify their portfolios, with the mainland authorities having tightened their grip on real estate and cryptocurrencies.

"These giants are widely known on the Chinese mainland, where most of their businesses are conducted. So it's a good thing if they can allow investors there to share their growth through the cross-border investment channels," says Ringo Choi, EY Asia-Pacific IPO leader.

The proven fundamentals of US-listed Chinese enterprises and new-economy businesses are also expected to boost Hong Kong's fundraising activities, which have lost steam since the start of this year. Total funds raised through IPOs in Hong Kong plunged 91 percent to HK$19.7 billion ($2.51 billion) in the first half of 2022, compared with the same period last year, according to data from PwC.

Tianfeng Securities analyst Kong Rong says 64 US-listed Chinese companies, with a combined market capitalization of $179.1 billion, are now close to meeting the requirements for a dual primary listing in Hong Kong. She expects share sales from these companies to hit HK$210 billion at most in the coming years.

Applicable resorts

Edward Au, southern region managing partner at Deloitte China, says some US-listed Chinese firms may seek a primary or secondary listing in Hong Kong by way of introduction — a shortcut for a flotation with no funds raised — as a "transitional measure". Shanghai-based electric-vehicle maker Nio and property agency KE Holdings are cases in point.

"Listing by introduction can impose less liquidity pressure on the market as there is no issuance of new shares," explains Au. "Companies going public in this way will eventually issue shares in Hong Kong when the market situation somewhat improves."

But some 180 Chinese companies listed in the US face a difficult situation as they may not be able to apply for a primary or secondary listing in Hong Kong, given the city's existing threshold for companies going public, including market value, revenue, net profit and operating cash flow, a Tianfeng Securities report said.

Such companies, including hardware manufacturer Canaan Creative and online used-car dealer Uxin, represent merely 11 percent of the total capitalization of US-traded Chinese enterprises. For small-cap companies in New York, the road ahead is either to go private if they have to delist, or look for an alternative venue to Hong Kong.

Privatization would be offered by controlling shareholders to buy back shares from smaller shareholders at a premium. Despite its high costs, most of these companies have relatively abundant reserves to do so as the ratio of their total cash to total market capitalization stands at 66 percent, with a median of about 47 percent, Kong says.

Choi from EY isn't pessimistic either, as smaller companies do not necessarily have to list in places like Hong Kong, which pools money from international investors. "Just a few fund managers would be enough to top up their valuation if a listing elsewhere, say, the Chinese mainland's A-share market, could be completed."