Capital markets in Hong Kong SAR are buzzing with exercise in 2024.

Mainland China’s largest freshly made bubble tea chain, Mixue Bingcheng, utilized for an preliminary public providing (IPO) on the Hong Kong Inventory Change (HKEX) and is trying to increase US$500 million to US$1 billion.

Mainland China web large Alibaba Group continues to checklist its sensible logistics arm Cainiao on the HKEX. That is the primary spin-off itemizing totaling greater than US$1 billion since August 2022 and could possibly be among the many hottest IPOs in Asia this 12 months, in line with Bloomberg.

In actual fact, Alibaba Group is neither the primary nor possible the final to interact in subsidiary spin-offs and subsequent IPOs. From 2018 to August 2022, 664 corporations IPOed in Hong Kong SAR, and of those, 64, or virtually 10%, went public via spin-off listings.

So, what’s behind the attraction of spin-offs generally and in Mainland China and Hong Kong SAR, specifically? I sat down with KPMG accomplice Mike Tang, CFA, CPA, for his perspective. A full video of our dialog is on the market in Cantonese and Mandarin.

Unlocking Potential Worth

So many listed corporations are eager on spin-off IPOs in Hong Kong SAR as a result of they ship worth to shareholders.

“One of the vital enticing facets of spin-off listings lies within the capability to unlock the potential worth of associated — typically secondary — companies and maximize shareholder worth,” Tang says.

Conglomerates with a number of enterprise strains determine the enterprise section with the best development potential — typically these are asset-light companies — after which look to checklist them individually via the spin-off. By way of the valuation course of, the market helps understand the potential worth of those companies.

Typically the spin-off results in an fascinating phenomenon whereby the market capitalization of the spin-off subsidiaries, resulting from larger price-to-earnings (PE) ratios, surpasses that of the mother or father firm. In different phrases, the components come to be value greater than the entire, which completely illustrates the attraction of spin-off listings.

The identical rationale applies to spin-off listings on the A-share market in Mainland China. These contain extremely sought-after idea shares or rising industries. The identical enterprise section, when listed on the home A-share market, advantages from larger valuation. In the meantime, the mother or father firm retains its possession and management over the newly listed subsidiary, sharing the industrial advantages introduced by the itemizing and additional driving up its personal inventory value. Within the case of Alibaba, the group retains possession of over 50% of Cainiao’s shares. This win–win state of affairs appeals to each the listed corporations and the foremost shareholders.

“Greater than 30 Hong Kong–listed corporations have efficiently landed their enterprise segments on the A-share market by way of spin-off listings since 2018,” Tang says.

Diversifying Financing Channels 

Spin-off listings additionally assist diversify an organization’s financing channels. For instance, even with immense development alternatives, biotechnology corporations typically lack entry to funding throughout their analysis and growth levels. This may depart them pressed for money. The spin-off itemizing opens an impartial financing channel for the subsidiary. It establishes clearer and extra enticing positioning and provides the mother or father firm added flexibility in its capital operations.

Having each onshore and offshore financing channels is a large profit, in line with Tang. “The impact of diversification is particularly evident when the group has impartial financing platforms each domestically and internationally,” he says. “It helps mitigate the impacts of particular person market volatilities on the group’s total financing capabilities and resilience.”

Enhancing Operational Effectivity and Competitiveness 

Spin-off listings may help corporations reassess their companies in order that each the mother or father firm and the subsidiary can give attention to their core segments. This, in flip, improves operational effectivity and total competitiveness. As well as, the fairness incentive launched by the spin-off motivates the subsidiary’s administration group and workers to realize higher efficiency. 

Making Hong Kong SAR a Capital-Elevating Hub 

For Hong Kong SAR particularly, the emergence of spin-off listings has boosted its competitiveness by growing the variety of new economic system listings, particularly giant, revolutionary platform corporations. Nevertheless, regulatory safeguards assist strike a steadiness between enhancing Hong Kong SAR’s competitiveness and defending buyers.

Hong Kong SAR–listed corporations in search of to spin off their companies into separate listings have to use to the HKEX in accordance with the Itemizing Guidelines Apply Observe 15 (PN15). Tang identifies three key areas that the alternate focuses on when reviewing spin-off itemizing purposes: 

1. Will the Father or mother Firm Nonetheless Meet the Itemizing Necessities after the Spin-Off? 

The HKEX examines whether or not the mother or father firm will retain adequate property post-spin-off and whether or not the remaining enterprise will conform to the alternate’s itemizing standards round profitability and market capitalization, amongst different necessities.

2. Does the Spin-Off Itemizing Serve the Pursuits of Present Shareholders? 

Not solely does HKEX contemplate the character of the spin-off enterprise itself, nevertheless it additionally examines how a spin-off itemizing will impression present shareholders. For companies with promising returns, the HKEX focuses on how the mother or father firm can derive industrial advantages by retaining management over the subsidiary. 

3. Will the Spin-Off Be Unbiased from the Father or mother Firm? 

PN15 explicitly requires that newly listed subsidiaries be impartial from the mother or father firm when it comes to enterprise, finance, and administrative administration.

“Related transactions between the newly listed subsidiary and the mother or father firm are of explicit concern,” Tang says. “As the 2 develop into separate listed entities with their very own shareholders, HKEX must be sure that there are not any suspicions of transferring advantages to main shareholders via linked transactions.” 

Proceed with Warning 

Corporations in search of to spin off components of their enterprise into separate listings ought to conduct a complete evaluate beforehand. They need to analyze market sentiment in addition to the scope of the deal and what it might imply for the diversification of their enterprise. They need to additionally contemplate the potential obstacles {that a} spin-off itemizing may create.

That requires growing a concrete technique and a long-term plan that takes under consideration the rules that the HKEX laid out. If the spin-off necessitates restructuring, the businesses ought to have interaction with the related intermediaries early on to make sure a easy itemizing course of.

If you happen to favored this put up, don’t neglect to subscribe to Enterprising Investor and the CFA Institute Analysis and Coverage Heart.

All posts are the opinion of the creator(s). As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the creator’s employer.

Picture credit score: ©Getty Pictures / Witthaya Prasongsin

Skilled Studying for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report skilled studying (PL) credit earned, together with content material on Enterprising Investor. Members can file credit simply utilizing their on-line PL tracker.