Capital markets in Hong Kong SAR are buzzing with activity in 2024.
Mainland China’s largest freshly made bubble tea chain, Mixue Bingcheng, applied for an initial public offering (IPO) on the Hong Kong Stock Exchange (HKEX) and is looking to raise US$500 million to US$1 billion.
Mainland China internet giant Alibaba Group continues to list its smart logistics arm Cainiao on the HKEX. This is the first spin-off listing totaling more than US$1 billion since August 2022 and could be among the hottest IPOs in Asia this year, according to Bloomberg.
In fact, Alibaba Group is neither the first nor likely the last to engage in subsidiary spin-offs and subsequent IPOs. From 2018 to August 2022, 664 companies IPOed in Hong Kong SAR, and of these, 64, or almost 10%, went public through spin-off listings.
So, what’s behind the appeal of spin-offs in general and in Mainland China and Hong Kong SAR, in particular? I sat down with KPMG partner Mike Tang, CFA, CPA, for his perspective. A full video of our conversation is available in Cantonese and Mandarin.
Unlocking Potential Value
So many listed companies are keen on spin-off IPOs in Hong Kong SAR because they deliver value to shareholders.
“One of the most attractive aspects of spin-off listings lies in the ability to unlock the potential value of related — sometimes secondary — businesses and maximize shareholder value,” Tang says.
Conglomerates with multiple business lines identify the business segment with the highest growth potential — often these are asset-light businesses — and then look to list them separately through the spin-off. Through the valuation process, the market helps realize the potential value of these businesses.
Sometimes the spin-off leads to an interesting phenomenon wherein the market capitalization of the spin-off subsidiaries, due to higher price-to-earnings (PE) ratios, surpasses that of the parent company. In other words, the parts come to be worth more than the whole, which perfectly illustrates the appeal of spin-off listings.
The same rationale applies to spin-off listings on the A-share market in Mainland China. These involve highly sought-after concept stocks or emerging industries. The same business segment, when listed on the domestic A-share market, benefits from higher valuation. Meanwhile, the parent company retains its ownership and control over the newly listed subsidiary, sharing the commercial benefits brought by the listing and further driving up its own stock price. In the case of Alibaba, the group retains ownership of over 50% of Cainiao’s shares. This win–win scenario appeals to both the listed companies and the major shareholders.
“More than 30 Hong Kong–listed companies have successfully landed their business segments on the A-share market via spin-off listings since 2018,” Tang says.
Diversifying Financing Channels
Spin-off listings also help diversify a company’s financing channels. For example, even with immense growth opportunities, biotechnology companies often lack access to funding during their research and development stages. This can leave them pressed for cash. The spin-off listing opens an independent financing channel for the subsidiary. It establishes clearer and more attractive positioning and gives the parent company added flexibility in its capital operations.
Having both onshore and offshore financing channels is a huge benefit, according to Tang. “The effect of diversification is especially evident when the group has independent financing platforms both domestically and internationally,” he says. “It helps mitigate the impacts of individual market volatilities on the group’s overall financing capabilities and resilience.”
Enhancing Operational Efficiency and Competitiveness
Spin-off listings can help companies reassess their businesses so that both the parent company and the subsidiary can focus on their core segments. This, in turn, improves operational efficiency and overall competitiveness. In addition, the equity incentive introduced by the spin-off motivates the subsidiary’s management team and employees to achieve better performance.
Making Hong Kong SAR a Capital-Raising Hub
For Hong Kong SAR specifically, the emergence of spin-off listings has boosted its competitiveness by increasing the number of new economy listings, especially large, innovative platform companies. However, regulatory safeguards help strike a balance between enhancing Hong Kong SAR’s competitiveness and protecting investors.
Hong Kong SAR–listed companies seeking to spin off their businesses into separate listings have to apply to the HKEX in accordance with the Listing Rules Practice Note 15 (PN15). Tang identifies three key areas that the exchange focuses on when reviewing spin-off listing applications:
1. Will the Parent Company Still Meet the Listing Requirements after the Spin-Off?
The HKEX examines whether the parent company will retain sufficient assets post-spin-off and whether the remaining business will conform to the exchange’s listing criteria around profitability and market capitalization, among other requirements.
2. Does the Spin-Off Listing Serve the Interests of Current Shareholders?
Not only does HKEX consider the nature of the spin-off business itself, but it also examines how a spin-off listing will impact existing shareholders. For businesses with promising returns, the HKEX focuses on how the parent company can derive commercial benefits by retaining control over the subsidiary.
3. Will the Spin-Off Be Independent from the Parent Company?
PN15 explicitly requires that newly listed subsidiaries be independent from the parent company in terms of business, finance, and administrative management.
“Connected transactions between the newly listed subsidiary and the parent company are of particular concern,” Tang says. “As the two become separate listed entities with their own shareholders, HKEX will have to make sure there are no suspicions of transferring benefits to major shareholders through connected transactions.”
Proceed with Caution
Companies seeking to spin off parts of their business into separate listings should conduct a comprehensive review beforehand. They should analyze market sentiment as well as the scope of the deal and what it may mean for the diversification of their business. They should also consider the potential obstacles that a spin-off listing could create.
That requires developing a concrete strategy and a long-term plan that takes into account the principles that the HKEX laid out. If the spin-off necessitates restructuring, the companies should engage with the relevant intermediaries early on to ensure a smooth listing process.
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All posts are the opinion of the author(s). As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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