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Mainland Entertainment Companies’ Secondary Listing Rush A group of Mainland Chinese cultural entertainment companies that IPOed abroad is seeking secondary listings on the Hong Kong Stock Exchange.

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admin 2021-01-25 Collect

Recently, a group of Chinese companies that went public abroad, include Bilibili (BILI. NASDAQ), Tencent Music Entertainment (TME.NYSE), and Joyy Inc. (YY.NASDAQ), all seem to be planning to return to the Hong Kong Stock Exchange for secondary listing at around the same time.

It’s a good thing for the companies as well as the investors.

According to recent financial media coverage, Bilibili has secretly filed for a secondary listing in the Hong Kong Stock Exchange. The listing is expected to happen in March 2021 and estimated to raise around 19.5-23.4 billion Hong Kong dollars (US$2.5-3 billion).

According to International Financing Review, although TME hasn’t decided on the specifics, the listing would involve 5%-10% of the company’s equity and raise approximately US$1.76 billion to US$3.5 billion. And Joyy. Inc. plans to raise around half of that amount.

As of January 15, the market cap of Bilibili reached 42.811 billion US dollars, the P/E ratio was -110.61, and the ROE was -31.50%. On March 28, 2018, B stood on NASDAQ. The initial public offering price was US$11.50 (approximately RMB 72.4) per share, raising US$483 million (approximately RMB 3.04 billion).

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Why go for a secondary listing?

Firstly, these companies all need more money on their hands to further invest in their businesses and prepare for rainy days.

For TME and Bilibili, they need a large amount of capital to acquire and produce new content to keep their market position.

While Bilibili’s cultural influence is growing rapidly, it’s also losing more and more money. After secondary listing, Bilibili will be on a better financial footing and able to continue to invest in its content.

Even though TME is a profitable company with a healthy income stream, it still needs more money than it can bring in to acquire content.

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Bilibili raised US$483 million from its IPO in 2018. Comparing to the US$2.5-3 billion that it plans to raise now, we can see that the size of the company and its operations has drastically expanded.

Secondly, secondary listings can raise the companies’ market cap.

After Alibaba’s successful secondary listing in Hong Kong, many companies started to look domestically for funding. Compared with Wall Street, Asian investors understand the business model and development potential of Chinese Internet companies more intuitively. The reevaluation from the capital market and new funds will accelerate a company’s growth.

Thirdly, the rapid growth of these companies makes them very sought after by the capital market.

When Bilibili first went public, the capital market had a lot of doubt because Bilibili’s income heavily relied on gaming, but now Bilibili has a more diverse and healthy business model with a rapidly growing advertisement operation. In addition, key operational indicators like MAU and revenue are also improving, making it a new favorite of the capital market.

Fourth, the financial market in Hong Kong has unique advantages.

Despite the turmoil, the Hong Kong financial market is still going strong in 2020. Last year, Hong Kong’s IPO raised a total of 397.7 billion Hong Kong dollars, up 25% from 2019, ranking second globally.

What kind of mainland China companies would qualify for a secondary listing on Hong Kong Stock Exchange?

The Hong Kong Stock Exchange has long been against the WVR structure, which resulted in Alibaba going public in the US.

After losing Alibaba to the New York Stock Exchange, the Hong Kong Stock Exchange implemented big changes to its listing criteria. In April 2018, the Hong Kong Stock Exchange adjusted the rules to allow companies with WVR structures. In addition, mainland companies that were banned from secondary listing on the Hong Kong Stock Exchange now have a way to achieve that.

 

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All these new rules are aimed at attracting mainland Chinese companies. On November 26th, 2019, Alibaba successfully completed its secondary listing on the Hong Kong Stock Exchange. With a market cap of HK$4 trillion, it became the largest company by market cap on the Hong Kong Stock Exchange.

On October 30th, 2020, the Hong Kong Stock Exchange announced the criteria for companies with WVR structures that can qualify for a secondary listing on the exchange.

Specific requirements are as follows:

First, the company has to be an innovative company.

Second, its market cap has to be at least HK$40 billion (around US$5.2 billion), or at least HK$10 billion in profit and aHK$1 billion in revenue in the most recent financial year;

Third, as of October 30th, 2020, the listing applicant must not represent more than 30% of the corporate WVR beneficiary in terms of market capitalization at the time of listing.

Fourth, the company has to be listed in the UK or the US but operates in the Greater China region.

Obviously, TME, Bilibili, Joyy.Inc, etc. all meet the requirements for the secondary listing on the Hong Kong Stock Exchange.

With these changes of Hong Kong Stock Exchange rules, many mainland Chinese companies will be going for an IPO or secondary listing in Hong Kong. In 2021, Hong Kong Stock Exchange might see the most capital raised in IPOs in the world. PwC estimated that there will be around 170 IPOs and secondary listings on Hong Kong Stock Exchange and the total capital raised will be around 420 billion to 460 billion Hong Kong dollars in 2021.

We believe this is a very good sign for the market. Hong Kong’s mature financial market and regulations would be a big help to the development of the companies and the investors would have more chances to get a scoop of the rapid growth of these new companies.

We look forward to the performance of these companies on the Hong Kong Stock Exchange.

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