Frost & Sullivan insights
On June 28, FinTech 1Q Holdings, a listed company on the New York Stock Exchange, disclosed its listing documents on the Hong Kong Stock Exchange, applying for dual primary listing in Hong Kong under the introduction route. Since the beginning of this year, there has been another wave of Chinese concept stocks returning to Hong Kong, with several companies announcing their intention to do so through an introduction route.
What are the differences between the method of 'introducing a listing' and the form of IPO issuance and listing on the Hong Kong stock market? Generally speaking, what are the reasons for choosing an introduction listing? Can going public on the Hong Kong stock market promote the valuation restoration of Chinese concept stocks? For other Chinese concept stocks in the fintech industry, what changes need to be considered for listing on the Hong Kong stock market? Does the dual listing through introducing a listing and then going public on the Hong Kong stock market by Fin16 this time have any reference value for other Chinese concept stocks in the fintech industry? Lu Jing, Partner and Managing Director of Frost & Sullivan's Greater China region, was interviewed by 21st Century Business Herald to analyze the reasons for the current upsurge in Hong Kong listings and discuss its impacts.
21st Century Economic Report
On June 28, Financial One (NYSE: OCFT), a listed company on the New York Stock Exchange, disclosed its listing documents on the Hong Kong Stock Exchange, applying for dual primary listing in Hong Kong under an introduction-based listing scheme. It is expected to commence trading on the main board of the Hong Kong Stock Exchange on July 4, with Goldman Sachs and HSBC serving as joint sponsors.
As a result, FinTech OneConnect has become the first fintech Chinese company listed on both the US stock market and the Hong Kong stock market.
In April this year, FinTech One was included in the 'pre-exemption' list by the US SEC. At that time, FinTech One stated that it has been actively exploring possible solutions to best protect the interests of its stakeholders. On February 28, 2022, the company submitted an application for dual primary listing on the Hong Kong Main Board with ordinary shares to the Hong Kong Stock Exchange, without involving any new issuance or sale of shares.
The latest financial report data shows that in the first quarter of 2022, Financial One Finance achieved operating income of RMB 1.019 billion, a year-on-year increase of 19.55%. The gross profit was RMB 349 million, a year-on-year increase of 20.19%. Operating losses amounted to RMB 355 million, an expansion of 2.47% year-on-year. After adjustment, the operating loss was RMB 318 million, narrowing by 8.09% year-on-year.
In the past three years from 2019 to 2021, Financial One Connect achieved revenues of 2.328 billion yuan, 3.312 billion yuan, and 4.132 billion yuan respectively, with gross profits of 767 million yuan, 1.243 billion yuan, and 1.437 billion yuan. The gross profit margin in 2021 was 34.8%, a decrease of 2.7 percentage points compared to 2020. As of now, the company has not yet achieved profitability. During the reporting periods from 2019 to 2021, the losses attributable to equity holders were 1.661 billion yuan, 1.354 billion yuan, and 1.282 billion yuan respectively.
Behind 'Introducing a Listing': There Is a Belief That the Stock Price is Undervalued
It is reported that Finacle One Connect has returned to Hong Kong this time through the method of 'introducing a listing', which, compared to an IPO through public offering, merely involves reapplying for listing and trading on the Hong Kong Stock Exchange with the shares held by the company on the New York Stock Exchange.
Financial One Connect mentioned in its application that having dual primary listing status on the Hong Kong and New York stock exchanges allows it to seize opportunities for fundraising in two different markets, attracting investors from diverse backgrounds and helping to increase the liquidity of shares. In addition, it also helps to enhance the company's visibility and synergize with the business expansion underway in Southeast Asia and other regions.
Lu Jing, Partner and Managing Director of Frost & Sullivan Greater China, told reporters that since listing does not require the issuance of new shares, there is no need for new capital raising. Capital can be raised through the issue or sale of company shares six months after listing to achieve refinancing.
"Introduction to listing" is not common. Public information shows that before 2022, only seven companies went public through an introduction process. Since the beginning of this year, there has been another upsurge in Chinese concept stocks returning to Hong Kong. Many companies have announced their intention to return to Hong Kong through an introduction process. Before FinTech1Chong, NIO (NYSE:NIO) had already returned to Hong Kong's Main Board through an introduction process. Tencent Music also announced in March that it plans to list on the Hong Kong Stock Exchange Main Board for a second time through an introduction process after obtaining regulatory approval.
Lu Jing told reporters that compared to traditional IPOs, the introduction of a listing approval process is faster and also conducive to improving transaction convenience. In terms of the approval process, since the prerequisite for an introduction to listing is that the company already has a certain number of public investors in different sectors on other exchanges or within the same exchange, and there are complete listing records filed during previous listings, the approval process will be quicker. As for transaction convenience, an introduction to listing can provide investors with more trading location options and more flexible trading hours in two local markets without diluting the shares of existing shareholders.
Additionally, there are views that listing in an introductory manner may be due to dissatisfaction with the current market valuation by the company.
In December 2019, Finanzium was listed on the New York Stock Exchange in the United States. At that time, the issue price per share was $10. As of the close on June 28th, Eastern Time, the company's stock price was $1.68, a 83.2% decrease from the issue price. "The company may feel that the current stock price is too low. If it continues to issue new shares, it could lead to dilution of the stock price, but if the pricing is too high, it would be difficult to raise funds. Therefore, they chose not to raise capital and go public," a relevant person from a leading investment bank told reporters.
It is worth mentioning that, before the official return to Hong Kong stock market listing, on June 9th, Fintech 1 Account announced that its board of directors had approved an expansion of the company's share repurchase plan by 1%. After this increase in holdings, the company can purchase up to 3% of the total issued ordinary shares by September 30, 2022. Fintech 1 Account expects to provide funds for the repurchase from its existing cash balance.
At that time, Ye Wangchun, Chairman and Director of the Financial One Connect Board of Directors, publicly stated: 'The expansion of the stock repurchase program scale indicates that we still have confidence in long-term business growth, and at the same time, we believe that the current market has underestimated our American depositary receipts.'
Why are Chinese fintech stocks listed in Hong Kong seeking to 'return to Hong Kong'
In addition to Fintech 1QiaoTong, many fintech Chinese concept stocks have also been rumored to go public on the Hong Kong stock market.
In March 2021, 360 Digital Finance (NASDAQ: QFIN) admitted during a performance call that it was preparing to go public in Hong Kong but that it was still dealing with some technical issues and was in the preliminary stage of an application for listing (A1). At that time, Xu Zuoli, Chief Financial Officer of 360 Digital Finance, stated that the requirements of the Hong Kong Stock Exchange regarding VIE structures were very different from those in the United States. 'So we need to make some changes and carry out some minor reorganizations under these new requirements in certain cases. We are doing this while talking about it, and these processes take time because some require regulatory approval. Once we solve these technical issues, we will promote the listing to some extent.'
Lu Jing believes that for other fintech Chinese companies listed on the Hong Kong stock market, going public in Hong Kong requires meeting the listing requirements and regulatory standards of both the Hong Kong and US exchanges. It is necessary to comprehensively consider factors such as the company's own situation, market environment, regulatory requirements, and listing review time, to choose a form of listing that better suits their needs.
Similar to FinTech 1Corp, the exploration of many fintech Chinese companies to return to Hong Kong for listing is driven by the desire to restore their valuation.
"Many fintech Chinese companies listed in the US initially chose this market not only because of its more relaxed listing requirements but also to obtain a higher valuation on the US stock market. However, after experiencing policy uncertainty in the past two years, the valuations of fintech Chinese companies have significantly declined. Listing back in Hong Kong can provide fintech Chinese companies with a series of favorable conditions such as increased liquidity, avoidance of policy risks, and expanded financing channels," Lu Jing told reporters.
CICC has released a research report indicating that, against the backdrop of stable industry growth, regulatory guidance to lower interest rates, and the introduction of credit reporting management measures, China's consumer credit technology companies will enter a 'deep-water zone' of transformation. With efficient completion of rectification, Chinese fintech stocks listed in Hong Kong can explore new markets, new customer groups, new models, and new products based on their existing endowments, promote diversified revenue to support future performance growth, and actively apply for financial licenses to achieve valuation restoration.
The valuation repair of fintech Chinese concept stocks has received positive regulatory signals, and the stock prices of several companies have slowly rebounded since March this year.
At a press conference held by the State Council Information Office in March, Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission (CBIRC), stated that the standardized rectification and improvement of platform-based enterprises involved in financial business are progressing smoothly, and various innovative financial services are gradually being incorporated into supervision.
On April 29, the Political Bureau of the Central Committee of the Communist Party of China held a meeting requiring the promotion of the healthy development of the platform economy, the completion of special rectifications for the platform economy, the implementation of regular supervision, and the introduction of specific measures to support the standardized and healthy development of the platform economy.
On May 31, the State Council issued the 'Notice on a Package of Policy Measures to Solidly Stabilize the Economy', proposing to 'promote the standardized and healthy development of the platform economy' and clarifying specific measures to support and promote the standardized and healthy development of the platform economy.
On June 22nd, the 26th meeting of the Central Comprehensively Deepening Reforms Committee deliberated and approved the 'Opinions on Building a Data Infrastructure System to Better Utilize the Role of Data Elements' and the 'Work Plan for Strengthening the Supervision of Large Payment Platform Enterprises to Promote the Standardized and Healthy Development of Payments and Financial Technology', and put forward detailed requirements for several contents.
In response, several securities firms have stated in research reports that the platform economy has already recovered. For example, Huaxi Securities stated in its research report 'The spring breeze of the platform economy has arrived, and fintech is fully blossoming.' It pointed out that the stage of key rectification by platforms has gradually ended, and the policy stance towards the platform economy has shifted from 'strengthening supervision' to 'supporting development,' with the development of the platform economy entering a virtuous cycle.
Frost & Sullivan Insight & Extended Reading
Q: Can the listing on the Hong Kong stock market promote the valuation restoration of Chinese concept stocks?
A:In recent years, due to the uncertainty in Sino-US political relations and the policies of US regulatory authorities regarding Chinese technology stocks, there has been an increase in doubts among US investors about investing in these stocks. Chinese technology stocks have experienced multiple rounds of decline in the US market. However, returning to Hong Kong provides an alternative trading location for enterprises, reducing market uncertainties brought about by geopolitical risks; at the same time, it is conducive to attracting more domestic investment institutions that understand the local market better. For outstanding companies, listing on Hong Kong will help promote valuation restoration.
*This article is reprinted from the 21 Finance client, authored by Li Lanqing, edited by Zhou Yanyan. The original title was 'Can We Learn from the Financial One Account's Official 'Return to Hong Kong' and 'Introduction to Listing' on July 4th?'.
