Cai Jin

Wooing tech IPOs: Do the ends justify the means?

Asian bourses keen to land New Economy listings may need to rethink game plans

Wall Street's widely watched S&P 500 Index has gained 8.5 per cent this year, but its rally is powered by technology shares, which have jumped about 20 per cent in value over the period.

Strip out the gains by tech stocks, however, and you will find that the S&P 500 is up less than 2 per cent.

What is more telling is that the spectacular tech gains are spearheaded by just five counters: Facebook and Amazon have both gained more than 30 per cent this year, while Apple, Netflix and Google are all up over 20 per cent. Collectively, the counters are known as FAANG.

Their gains mask the weakness in the broader market, where traditional, high dividend-paying Old Economy stocks favoured by mum-and-dad investors have suffered a sell-off. These include household names such as General Electric, down 13.2 per cent, AT&T, which has slipped 8.7 per cent, and ExxonMobil, off 8.1 per cent.

In our own backyard, there is a similarly powerful rally in tech stocks led by three China Internet giants - Baidu, Alibaba and Tencent - which are collectively known as BAT.

Alibaba has shot up 64 per cent so far this year and Tencent has risen nearly 50 per cent - outperforming their United States rivals by a big margin in percentage terms - while Baidu is up 8.3 per cent.

The irony is that few Asian bourses are benefiting in a big way from their spectacular run-up. Tencent is listed in Hong Kong and is now the biggest component stock by market value on the widely watched Hang Seng Index, but Baidu and Alibaba, as well as a host of other Chinese e-commerce firms such as Weibo and JD.com, have found New York to be a more convivial listing destination.


WeChat mascots on display near Tencent's office in Guangzhou. The Internet giant listed in Hong Kong, but other hot New Economy firms seem to be looking outside the region for their IPOs, which has Asian exchanges scrambling to find ways to woo their own Alibabas. However, instead of trying to ape New York, regional bourses could pursue more innovative strategies to win over high-growth firms and secure long-term viability. PHOTO: REUTERS

Still, like it or not, the FAANGs and BATs of this world are disrupting economies in ways that are causing plenty of grief for their brick-and-mortar rivals in sectors as diverse as banking and retailing. There also seems to be little on the horizon to dent their growth.

So it comes as no surprise that regional bourse operators are looking for ways to at least try to capture part of the heavy activity that these hotly pursued stocks attract, if only to increase their own attractiveness as trading venues and secure long-term viability.

The Singapore Exchange (SGX) started the ball rolling early this year by seeking public feedback on whether to allow dual-class shares, which give certain shareholders disproportionately more voting rights. Now, Hong Kong Exchanges and Clearing (HKEx) has upped the ante by proposing a totally new board altogether - one that would list New Economy companies exclusively, in sectors such as Internet and biotechnology.

The HKEx wants to further sweeten the move by dividing the new board into two segments - one for start-ups with no financial track record whose shares will be available only to professional investors, and another for established companies whose shares will be available to all.

The new board would also provide "weighted voting rights", and impose no further restrictions or additional investor safeguards on firms already listed in non-Chinese stock markets elsewhere that want to seek a secondary listing on it.

Considering that HKEx has been the world's leading stock exchange for initial public offerings (IPOs) for five of the past eight years, it might seem a tad surprising that the bourse would bend backwards in such a big way in order to secure more New Economy listings.

But HKEx is known to be worried about its inability to get good-quality foreign issuers to list on it. Its equity segment is now dominated by mainland companies, which make up almost two-thirds of its market value and have represented 90 per cent of funds raised from IPOs for the past five years.

Even though it is riding high now, HKEx noted "there is a significant risk that the Hong Kong market's low exposure to higher-growth sectors will lead to stagnation and a lack of investor interest". This is because property and financial counters make up 44 per cent of the exchange's stock market capitalisation, while the so-called New Economy stocks that it is eyeing make up only 3 per cent of its listings.

Still, one question to be asked about HKEx's soul-searching over launching a board for New Economy stocks is whether such a move is the right answer for long-term viability.

True, the "one size fits all" listing framework now in place in many markets might no longer be adequate or attractive enough to meet the requirements of the New Economy firms that they are so desperate to attract.

Plenty of start-ups have been able to raise money from private equity firms and well-heeled individuals without having to resort to the stock market to finance their businesses.

Some technology entrepreneurs have even been able to use online crowdfunding exercises such as "initial coin offerings", minting their own digital currencies and selling them, to raise tens of millions of dollars, sometimes in a matter of minutes, without even having so much as a computer code for their investors to test drive.

Some have suggested that one way to increase the allure of a public listing for such New Economy firms would be to have more flexible listing rules, but the big worry is the risk of reputational damage should any corporate scandals erupt because of the relaxations.

It is not an idle concern, since the bulk of the IPO targets that HKEx is likely to get would be firms from China - a developing market with a whiff of the Wild West - where Hong Kong regulators have no direct jurisdiction and the bankruptcy laws are different.

No doubt, the spotlight is now on HKEx, but many of the salient concerns that it has triggered about long-term viability are also being raised here about the Singapore stock market.

Like HKEx, SGX is chock-full of Old Economy stocks. It has also drawn a strong reaction from fund managers, who fear that adopting dual shares might spark "a race to the bottom" between regional bourses as other operators follow suit.

One question to ask is whether there are other ways to make regional bourses attractive listing venues for New Economy stocks, apart from trying to emulate New York by allowing practices such as dual-class shares - a framework that runs contrary to the long-established "one man, one vote" practice here.

When confronted with vitriolic attacks on herself and her husband, former US first lady Michelle Obama famously said "when they go low, we go high". In that vein, shouldn't the same attitude be adopted by the likes of SGX in dealing with the challenges confronting them?

Changes such as more flexible listing regulations and dual-class shares would have only a limited impact, at best, in enhancing the appeal of bourses that wants to ape New York. Instead, a better solution might be to take a leaf from the history book on how success is achieved by looking for niches not served by markets elsewhere. One good example is the real estate investment trust (Reit) market - which Singapore was one of the earliest in the region to develop.

Of course, any bourse would be delighted to have Alibabas to showcase, but will the end justify the means in attracting them?

A version of this article appeared in the print edition of The Straits Times on July 03, 2017, with the headline 'Wooing tech IPOs: Do the ends justify the means?'. Print Edition | Subscribe