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Why Jack Ma’s Ant Group chose a dual IPO in Hong Kong and Shanghai and not New York

As financial technology giant Ant Group gears up for one of the largest initial public offerings of all time, New York’s stock exchange is being left out in the cold.

The decision is a rare occasion where a marquee Chinese company has bypassed the world’s largest financial market entirely. Even Tencent Holding, its closest domestic competitor, conducted investor roadshows in the US before plumbing for a Hong Kong listing in 2004.

Ant’s choice of Shanghai and Hong Kong illustrates a shift in the balance of financial power eastward as more of China’s leading technology companies raise capital in markets closer to their users, creating a positive feedback loop of deeper secondary trading that attracts still more companies.

Hong Kong and Shanghai’s Nasdaq-like Star Market are innovating rapidly to keep this momentum going. Hong Kong this week unveiled plans for a technology index for investors to track fast-growing technology start-ups and behemoths, after the recent “homecoming” of Alibaba Group Holding, JD.com and NetEase, among others.

The restyling of Hong Kong and Shanghai confirmed the operator of Alipay e-commerce payments system long-held preference for local listings, people familiar with its thinking said. That leaning was conveyed to investors in June 2018, when it completed a Series C fundraising that valued the group at US$150 billion.

The reasons are twofold. Firstly, the rule that foreigners could not control an online payments company simply rendered an offshore listing unlikely. Secondly, it has been the group intention to stick close to home or the Asian region, where its army of consumers is based.

To underscore that, e-commerce giant Alibaba sold control of Alipay in 2011 so that the Ant unit could apply for a mainland China payment business licence. While China has since lifted its foreign ownership caps on financial institutions, Ant is still sticking to listing venues close to home.

Regulators are well aware that the size and growth of Ant is a catalyst for change, one that has the capacity to disrupt the nation’s financial system severely. Ant still operates in the politically sensitive consumer payments and online lending industries and is still tightly regulated by the People’s Bank of China, even though these businesses now represent a small percentage of the group revenues. The firm instead is now focused more on growing its fee-based rather than capital-intensive businesses.

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China is rapidly becoming a cashless society with an estimate of more than 900 million consumers. The transactions over its payments system give Ant valuable insights into the everyday user behaviour and spending patterns of Chinese citizens.

Underscoring the sensitivity of finance in China is the fact that very few Chinese financial institutions are currently listed in the US. For example, Bank of China made its debut in Hong Kong in June 2006 and in Shanghai a month later.

The nation’s third-largest lender does trade in New York, but in the form of an over-the-counter American depositary receipt. All Chinese incorporated companies that want to list overseas need regulators’ approval.

So, why a dual listing in Hong Kong and Shanghai? If it isn’t going to tap the deep pool of liquidity in the US markets, offering shares to both onshore and offshore markets will allow Ant to reach a wider base of potential investors.

Many international investors do not have the mandate to invest in yuan-denominated assets because of the capital controls regime. As such, most of China’s largest lenders and insurers have an A or H share listing that serves the purpose.

As well as bringing in new investors, a Hong Kong listing is also important for Ant’s existing owners and new investors who might want to sell with ease.

Many Ant employees own stock in their company, as well as foreign investors such as Singaporean state funds GIC and Temasek, Carlyle, the Canada Pension Plan Investment Board, who took part in Ant’s earlier rounds of funding.

At the same time, a listing in mainland China would also make trading in Ant’s shares more accessible to its users. As Tencent found during its investor roadshow to the US back in 2004, explaining the breadth of superapps such as Alipay and WeChat is harder when people do not have the direct everyday experience of using one app for multiple daily tasks.

Ant is also hoping that investors give its valuation a fillip for being part of the Alibaba ecosystem, rather than just viewing it as just a sum of its parts, the people said.

Alibaba, which owns 33 per cent of Ant and is the owner of the South China Morning Post, originally wanted to list in Hong Kong rather than the US partly to be closer to its user base. It only plumbed for a New York Stock Exchange listing after failing to convince Hong Kong’s regulators to allow for its dual-class stocks, where founders and management have more votes than ordinary investors.

After Hong Kong regulators changed their minds and allowed weighted voting rights under a package of reforms in April 2018 Alibaba created a secondary listing in the city in November, after fulfilling its so-called “track record” of five years in New York.

The dual-class share issue is not relevant for Ant as it is incorporated in China where weighted voting rights are not allowed. However, being close to its users is top of mind, the people said. Ant uses Chinese Accounting Standards, they added.

Eric Jing, Ant’s executive chairman. Photo: Tom Wang alt=Eric Jing, Ant’s executive chairman. Photo: Tom Wang

Chinese regulators, on the other hand, launched a Nasdaq-style technology hub called the Star Market in Shanghai last year. For Ant, importantly, the Star market introduced a registration-based IPO system and did away with the implicit valuation ceiling of 23 times earnings for IPOs.

JD Digits, the financial technology arm of e-commerce giant JD.com, is also preparing to float on Shanghai’s Star.

“The innovative measures implemented by SSE STAR market and the SEHK have opened the doors for global investors to access leading edge technology companies from the most dynamic economies in the world and for those companies to have greater access to the capital markets,” said Eric Jing, executive chairman of Ant Group on Monday.

An IPO close to home also supports the development of financial markets in China, a move that would curry favour among bureaucrats Beijing who want to see high-profile technology stars list in domestic markets.

Hong Kong’s role as an international hub for technology companies would be assured by Ant’s arrival, by accelerating a positive feedback loop as more IPOs by large and fast-growing companies means more secondary-market activity. Stock analysts at Goldman Sachs value Ant at US$205 billion in its sum-of-the-parts analysis.

The recent flare-up in US-China relations and innovations by Hong Kong and Shanghai’s Star may have vindicated Ant Group’s decision to skip New York as the pressure builds on US-listed Chinese companies to create funding avenues closer to home.

There is some consolation for New York, however. Wall Street investment bankers are only too happy to welcome a big client like Ant Group to continue their impressive run of advisory fees so far this year. CICC, Citigroup, JP Morgan and Morgan Stanley are said to have been picked to manage the IPOs. Spokespeople for the banks either declined to comment or did not respond to a request for comment.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.