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The IPO market in Southeast Asia is rising in popularity despite a global IPO slowdown. The region has experienced robust economic growth for several years owing to a positive growth outlook. Countries like Singapore, Malaysia, Thailand, Indonesia, the Philippines, and Vietnam have consistently posted strong GDP growth rates, making them attractive destinations for investment. There is a healthy deal flow for investors to explore and tap into given each country’s stable macroeconomics, healthy demographics and pro-growth policies.
Southeast Asia is seeing a robust influx of foreign direct investment, with FDI flows to Malaysia growing 39% y-o-y in 2022 to US$17 billion, and flows to Vietnam and Indonesia rising 14% and 4% y-o-y, to $18 billion and $22 billion, respectively, according to UNCTAD’s World Investment Report 2022.
In September 2023, DealStreetAsia partnered with HKEX to host an exclusive panel discussion at the Asia PE-VC Summit in Singapore on what makes Hong Kong a viable and vital destination for IPO-ready Southeast Asian companies.
Before an audience of investment professionals and growth-stage business leaders, the high-profile panel, including Christina Bao, Co-Head of Sales & Marketing at HKEX; Andy Tai, Head of Investment Banking in Southeast Asia at Goldman Sachs; and Arun Balasubramanian, Partner at Freshfields Bruckhaus Deringer, shared details and perspectives on Hong Kong’s attractiveness to overseas issuers, especially those from Southeast Asia.
DealStreetAsia’s Greater China deputy editor Eudora Wang moderated the session, explaining that HKEX has introduced a series of listing reforms over the past five years, from the rollout of new listing chapters in April 2018 that opened gates to pre-revenue biotech companies, weighted-voting rights issuers, and secondary listings of overseas issuers; to the more recent Chapter 18C for public listings of specialist tech companies and enhancements to the Connect programmes, such as the inclusion of eligible Hong Kong-listed international companies into Southbound Stock Connect.
With over 270 new-economy companies having listed in Hong Kong since the 2018 reforms, raising over HK$920 billion ($118 billion), the city’s stock market is diversifying beyond traditional financial services and property sectors. New economy companies account for 64.7% of total IPO funds raised since 2018.
Setting the context for the discussion, HKEX’s Bao noted that in the past 10 years, the total funds raised by Hong Kong-listed companies amounted to $355 billion, making it the top-ranked exchange globally.
The panel discussion shed light on several key IPO trends in the region and how issuers can be better informed to choose the right listing venue. Read on for a transcript of the discussion, edited for brevity and clarity.
Currently, Hong Kong’s stock market is largely dominated by issuers from mainland China and Hong Kong. Could you share some insights on the presence of Southeast Asian companies on the exchange, i.e., the number of listed SE Asian companies in HK and their total IPO fundraising over the years? And what makes Hong Kong an attractive venue to these issuers?
Christina: The first thing I want to note is that ~2,600 companies are listed in Hong Kong, and around 160 of those are from countries and jurisdictions outside Greater China. Among the 160, over 100 are from ASEAN. Many ASEAN companies have listed in Hong Kong because of its liquid capital markets, robust legal system, financial infrastructure, attractive listing framework and diverse investor ecosystem.
The types of ASEAN issuers listed in Hong Kong historically were mainly from the consumer, infrastructure, or even real estate sectors. Now the ASEAN economy is growing and new economy companies are emerging; we are expecting both the number and diversity of ASEAN issuers at HKEX to increase a lot in the coming decade.
Can you tell us more about the interest level among Southeast Asian companies to go public in Hong Kong based on your conversations with clients and IPO prospects?
Christina: HKEX was delighted to join the delegation led by Hong Kong Chief Executive John Lee to Singapore, Indonesia, and Malaysia in July. When we were in Jakarta, we signed a Memorandum of Understanding with the Indonesia stock exchange. I think it’s a clear indication that Hong Kong is committed to the growth of the region, and we’re excited to collaborate on enhancing investor access and product liquidity and encouraging cross-listings. For example, a lot of Indonesia-incorporated companies probably would choose to list on the local exchange due to tax reasons and local market awareness. But even after listing, some of them may hope to become more visible to global investors.
Secondly, if you’re looking at the combined trading volume on a daily basis across all the key ASEAN exchanges, it’s still around 50%-60% of the daily trading volume of the Hong Kong market. As an investor, you definitely want to seek liquidity, and the closest location to find that liquidity is Hong Kong. But in order to access it, companies have to compare listing regimes, figure out things like share fungibility, i.e. research how to move shares between exchanges and, in some cases, identify foreign holding limitations.
So all these things need to be sorted out between regulators and infrastructure providers. I think it is a very good first step for us to get much closer to the local market but also to be pragmatic on the ground and make it easier to list in Hong Kong, either through a single primary listing or a secondary listing.
In Southeast Asia, we’re looking at very strong demand for liquidity in these challenging times. Despite stock markets everywhere having a difficult time, the IPO market here remained strong. In your perspective, looking at the Southeast Asian demand for IPO-ready companies, is this trend going to sustain for the next few years?
Andy: I think in terms of companies wanting to do an IPO, quite a lot of them in the pipeline might need to get out and get listed. Obviously, consideration of the right venue is top of mind for issuers. I would say one thing that’s really driving that pipeline will be the diversity in the type of companies that want to get listed, especially in this environment. For example, in Indonesia, there are a bunch of IPOs that got done this year, and the larger ones were mining companies with exposure to the value chain, somewhat similar to Hong Kong. There were also the tech unicorns and a lot of consumer tech companies with similar exposure. So, in some ways what’s driving the pipeline in Southeast Asia is a bit differentiated by the diversity. But more importantly, for all these companies, aside from the brand recognition, what’s helpful for them is to be open to a lot of listings and multiple listing venues and the fact that, ultimately, they all become very large global games that notwithstanding the venue, investors will understand their designated business model and resonate with it.
Can you share some insights on the interest level among Southeast Asian clients in investing in Hong Kong?
Arun: It’s an interesting question and a neat little segue into some history. In 2020 and 2021, a very large number of unicorns across the region, in Indonesia and Singapore in particular, had been waiting to go public for a very long time and then the SPAC phenomenon happened. For some time, every one of them explored going public in the US through a merger with a US SPAC. A couple of them were successful – you had Grab and PropertyGuru, but there were several others that explored these SPACs which didn’t ultimately happen. Some of them did alternative structures – Gojek and Tokopedia came together to form GoTo, and this one locally in Indonesia. But interestingly, I don’t believe that the SGX or the Hong Kong stock exchange benefited very much from that phenomenon.
Around that time, both the exchanges said they need to have their own SPAC and de-SPAC regime. “Why are our homegrown companies going and sharing shareholder upside with US shareholders? We need to set up our own regimes,” they felt. So Singapore came first, Hong Kong came three months later. In both the markets, you have a small handful of SPAC IPOs. All of that went quiet because people couldn’t then find a path to a de-SPAC. And the US de-SPAC market grew substantially. Now we’ve just announced the first ever de-SPAC on the Hong Kong stock exchange; it is possible that one or two of the Singapore SPACs will be announcing something soon. That should then start to get people interested, which is if there is in fact some trading in the de-SPAC securities, if there is some stock price appreciation, you can potentially see companies in the region saying this might be a way of actually trying to go public in these markets, again, by no means certain.
So that’s a bit of a segue into an alternative means of going public in the region. But I don’t think we can say there’s been this flood of listings in Southeast Asia. I think the ones in Indonesia have a very specific kind of raison d’etre, if you will. I think the ones that are happening in Thailand, they all have their own very uniquely Thai story. But equally, I also know, acting on the M&A side of things, that I’m sitting on about 45 shareholders agreements right now where the date for an IPO exit has come and gone. So you’ve got a whole bunch of financial sponsors, venture capital firms, private equity firms sitting around and saying, “Okay, how am I going to monetise? Where is my liquidity?” So the pressure is building along. And, of course, there was a lot of venture capital funding that happened in 2021. At some point, those monies are going to start going down in terms of whether companies have enough cash, and then I think there will be pressure. I think people will have to start looking quite seriously into doing an IPO. Even if it’s an IPO that’s effectively a down round, I think that’s big. That’s the barrier that a lot of people don’t want to cross – “my last round in 2021 was at ‘x’, now you’re asking me to go IPO at 0.8x?” That is not a good thing for a lot of people. But that’s probably what might happen.
From the exchange perspective, how will the series of reforms to enhance the Hong Kong market access help overcome the challenges that we see across Southeast Asia, including a rising demand for liquidity and uncertainties from the macro market environment?
Christina: Going public is one route for startups to seek funding and liquidity, but it’s subject to market appetite. If you consider Hong Kong these days, a lot of people have been telling us that Hong Kong has been known as the home to a number of Chinese issuers, but in terms of issuers from other jurisdictions, it may need time to develop.
The way that I look at it is slightly different. The size and depth of Hong Kong market has been well developed and the market has gathered a large number of global institutional investors, which will be available to support the funding initiatives of issuers across various regions. In Hong Kong, issuers can find large investors from around the world all actively looking for investment opportunities, and this is a great plus for Hong Kong.
When ASEAN issuers consider an offshore listing, it is a lot easier for them to just choose a market closer to their time zone with the benefit of accessing a deep investor pool, instead of having to cross several time zones to just be able to access additional liquidity. This would work particularly well for corporates with either global ambition or strong growth trajectory.
The other part of the story is the China angle. Stock Connect is the main access channel into Mainland China markets for international investors and it is the main access channel for Mainland China investors to invest overseas. Capital pools in China are growing and investors there are keen to diversify and find new investment opportunities.
Investing in Hong Kong via Southbound Stock Connect offers Mainland China investors diversification opportunities, and the enhancements made to Southbound Stock Connect over the years, such as the inclusion of ETFs and international companies primary-listed in Hong Kong, have grown the opportunity set for Mainland investors.
The inclusion of eligible, Hong Kong-listed international companies in Southbound Stock Connect could be a game changer. The liquidity opportunity generated from Mainland China alone is very significant. The Mainland has a vast retail investor population, estimated at 212 million – equivalent to the population of Brazil – with a massive collective buying power, which drives A-share turnover on the mainland exchanges of close to RMB 1 trillion per day.
Thus, Hong Kong offers a confluence of both international and Mainland China capital, and we expect a lot of interest in new economy companies from these investor groups.
Do investors in the Greater China region have a certain preference for the type of companies that usually have Chinese shareholders and their cap tables? Is it of great importance for such issuers to have operations in the Greater China region?
Andy: I don’t think it’s necessary to have the Chinese angle. It would be helpful to communicate the investment to investors, but it’s not necessary for a listing in Hong Kong.
Investors think about liquidity, and they think about understanding the business. Essentially when you guide them, it’s always easier to take comparables: Think X as a Southeast Asian version of Y. The angle would be: Is there a strong, already publicly-listed company that is not a competitor but a direct comparable in some ways to the Southeast Asian IPO hopeful? It helps guide investors through a more simplified communication process to understand the business.
What do you think is the unique value proposition? And what type of issuers may find Hong Kong more attractive as a listing venue?
Christina: An overseas listing probably wouldn’t work for everybody, so I wouldn’t say that every ASEAN company should consider a Hong Kong listing.
The relevance lies in a few areas: One, a China angle of course could be the low hanging fruit. Investors – whether Mainland or international – familiar with the business models and trajectories of new economy Chinese companies, may more easily appreciate the growth stories, sector dynamics and expansion potential for ASEAN companies operating in economies, like Indonesia, which have similar demographic drivers to those of China ten years ago.
But the other types of companies that we believe might find Hong Kong attractive are those that operate across ASEAN but don’t necessarily belong to one particular jurisdiction, for example those that operate in Malaysia, Singapore and Indonesia. It’s probably easier for them to consider an overseas listing to attract a wider investor base.
What important milestones do SE Asian companies need to achieve to get themselves started on the IPO path on a local exchange, versus the preparation needed to qualify for a HK listing? Are there any fundamental investor questions that need to be answered for investors in HK to buy into a SE Asian IPO?
Arun: I think every IPO is a long and complex journey and requires a lot of stamina for the issuer company, the shareholders and obviously all the transaction participants. One of the great advantages that I found with Hong Kong is that the professional services community in Hong Kong is extremely professional and well versed in delivering what it means for an IPO. You’ve got the accountants, you’ve got the lawyers, the industry experts, who, because of the sheer volume of work on the Hong Kong stock exchange, know exactly what needs to be done. That I think is a bit of a difference from a number of local exchanges, local jurisdictions where you don’t always have that expertise to hand, particularly when it comes to sector knowledge, when it comes to writing industry reports, and so on. So there I think Hong Kong does have an advantage. And probably the only other place that I would see that’s on par with that, in terms of professional service support is probably New York City.
The due diligence exercise for a Hong Kong IPO is very extensive. Because Hong Kong has a so-called sponsor regime, where the lead investment banks working on the transaction are charged with liability as sponsors by the Securities and Futures Commission on the Hong Kong stock exchange. What that means is there is very detailed due diligence that they need to do in order to be able to sign off on your perspectives. Again, not fundamentally different from every other stock exchange, because we all run largely disclosure based regimes here, you have local rules that require underwriting banks, or issue managers to conduct a certain amount of due diligence. But Hong Kong I think is just very detailed and sometimes quite formulaic. And people need to be prepared for that.
But equally on the flip side, what ends up in the prospectus is a lot of very good and very fair disclosure, which, again, from an investor standpoint, is a good thing. Overall timelines, I would say is about six months, again, on par for the course for almost all the exchanges, whether it’s the SGX, the IDX, or Bursa, wherever, six to four months for preparation, and then you filed the draft prospectus with a regulator in Hong Kong. The Hong Kong stock exchange and the SFC will review and provide cover to the perspectives and then you get your listing approval and you go off to the races. You do your roadshow and then you list. So in those respects, I don’t think there is a huge amount of timing arbitrage, I think six months is probably a fair benchmark. Transaction expenses, some would say that it’s a little more expensive for Hong Kong than some of these other jurisdictions, I think in the whole, probably not materially so. I think there is a bit of convergence of underwriting fees across the region. So they’re all within a certain band, obviously, if you’re listing on NASDAQ, or the New York Stock Exchange, you’re talking about a very different level of underwriting pains, but other kinds of transaction costs, legal advisory fees, accounting fees, and so on. I would say they are broadly similar, but perhaps Hong Kong is at the somewhat more expensive end, together with Singapore.
There are about 20 stock exchanges worldwide with a total market cap of over $1 trillion each. In your mind, what are the most viable places for SE Asian companies to pursue IPOs?
Andy: I don’t have one descriptive answer to that because every situation is influenced by multiple factors such as – liquidity, are there direct comparables on the stock exchange? Listing cost, time zones, what are the governance and structure rights? Do you want to work on a single class? Is the future right to raise money? Is there a need to raise money? So multiple considerations as well as a framework. I would think around the key considerations to choose the right exchange.
Arun: If I may add to that, it is probably a good time to talk about the Hong Kong stock exchanges experience, which deals with listings. So this is one area where companies don’t have to be monogamous, right? There might be pressure to list in your own domestic exchange, but I think there’s really one exchange in the region that understands dual listings better than any other and that is Hong Kong. There is quite a long track record of Hong Kong housing dual listings of companies that are listed in the US, companies that are listed in the UK. We recently almost completed the listing of a company that’s already listed in the Bursa Malaysia, and in Singapore, which is looking at a third listing, a primary listing in Hong Kong. And Hong Kong also has primary as well as secondary listings. The advantage of a secondary listing is that you can still continue to primarily comply with the requirements of your home country. But Hong Kong gives you a relatively, lightly regulated regime you can still use to raise capital. So that is something I think we really should highlight. Because this is not just a story for unlisted issuers. This is also a potential story for listed companies, which announced saying, “Okay, I’m now listed, but I’d like exposure to a bigger market. I’d like to get new investors in, but raise a lot of new capital, I think a secondary listing or a primary listing in Hong Kong might be quite viable.”
Christina: I just want to clarify one point about secondary listings.
If you are a company already listed on a local exchange, seeking another listing in Hong Kong: With a dual-primary listing, it means that you basically need to comply with the regulations of both markets – your home market and the Hong Kong market.
The advantage of a dual-primary listing is that Hong Kong-listed stocks will be included in Southbound Stock Connect to access Mainland China liquidity.
What’s the one direct practical advice you’d like to give to your clients who are IPO ready and may be planning an IPO in the next two to three years?
Andy: I think the advice in terms of getting IPO-ready is to have a good sense of what kind of corporate structure and governance you want to go with going forward. Because where we see the challenge, for most entrepreneurs, is pivoting from a private company into a public company where you get a lot of public scrutiny and questions; a lot of people are caught by surprise. A lot of investors might ask questions about their business in a more public forum. You also need to guide the market on forward estimates as well. So, the threshold in terms of governance and scrutiny is much higher. We tell people to look out for that.
Christina: For any company, an IPO is a major corporate milestone. Firstly, I’d say get prepared as early as possible because a lot of planning has to be done at least three or even five years ahead of time.
Secondly, keep your ears and eyes open. Talk to as many professionals as you can to gather the right intelligence because the market is moving very, very rapidly. There could be a lot of new changes.
Thirdly, be in the game for the long-term. The private market is very full as far as we can gauge. I think it’s very important to have long-term thinking in doing your IPO so that investors can benefit, you can benefit, and the entire ecosystem around you can benefit.
Arun: Following up on that, I’d say three things. The first is governance. Second is internal controls. The third is financial statements. Governance, very often, is an aspect that companies leave until very late in the process because you think you’ve got a shareholders agreement that sets out your governance protocols as a certain way of functioning, but governance in a publicly listed company is very different. You need to go out and identify independent directors, you may no longer have some of the preferential rights that some of your long standing shareholders have had, as shareholders in your company. You don’t want to leave that too late. Getting good independent directors takes time. And we see companies scramble at the end, and very often end up with somewhat unsuitable independent directors. You do want to plan for that. If your founders are keen on having, say, extra voting rights or weighted voting rights, that, again, is something you want to think about quite early on. And really, I think there are only two markets that really understand weighted voting rights. And those are the US market and the Hong Kong market. You can do dual class stock in Singapore and in several regional exchanges. But regulators don’t like that they don’t really understand them. So if you’re looking at weighted voting rights, again, something you need to think about early on, and how are you going to plan for that, because that also has a certain marketing impact.
Internal controls, get your consultants on early, this is not something you want to be distracting you as you’re about to go for an IPO. Because stock exchanges and investors are going to be worried that you are in fact ready to transition from a private company to a public company. And finally, financial statements, which I’d say from a lawyer’s perspective, or bankers perspective, the single biggest gaining item in virtually every IPO. It just takes a lot longer to get done than you originally anticipated. So you might want to start early on what is the set of accounting principles you want to be using? What are the audit standards you want to be using? If you want to list on the SGX you want to incorporate a Singapore company, to list, say in the US or in Hong Kong? That has a certain set of ramifications, you don’t want to start that too late.