Impact of Shanghai and Hong Kong policies on where to list

By Liu Yinhong, Lu Jiangxia and Yu Zheng, Jincheng Tongda & Neal
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China Securities Regulatory Commission chairman Yi Huiman told the recent Lujiazui Forum that the regulator had “always been open to enterprises’ choosing listing locations”. Companies may choose where to list independently, and based on their individual development needs, he said.

刘胤宏, Liu Yinhong, Senior partner, Head of capital market practice, Jincheng Tongda & Neal
Liu Yinhong
Senior partner, Head of capital market practice
Jincheng Tongda & Neal

“Some enterprises want to be listed abroad, and some listed abroad want to return to China’s capital market,” Yu told the forum, “all of which are supported by us in principle.”

His comments showed that Chinese regulators are increasingly inclined to take a “market-oriented” attitude towards companies’ choice of listing locations.

Nevertheless, different policy environments have a great impact on the choice of where to list different types of enterprises. This article looks at two of the most popular destinations: the Star Market in Shanghai and the main board of HKEX.

Differences in policy guidance

Star Market. The Star Market highlights the characteristics of “hard technologies”, mainly serving scientific and technological innovation enterprises that are in line with the national strategy, have key breakthrough and core technologies and have high market recognition. The market focuses on supporting the latest generation of information technology, high-end equipment, new materials, new energy, energy conservation and environmental protection, biomedicine and other high-tech and strategic emerging industries. However, it does not accept for listing financial technology enterprises, mode innovation enterprises, real estate enterprises and enterprises mainly engaged in financial and investment businesses.

There is no legal definition of “hard technologies”. In the industry, they generally refer to eight high-end, precise and advanced technologies represented by artificial intelligence (AI), aerospace, biotechnology, optoelectronic chips, information technology (IT), new materials, new energy and intelligent manufacturing. They are original technologies that need long-term R&D input and continuous accumulation, and have a very high technical threshold and technical barriers, and thus are difficult to be copied and imitated. From this definition, the hard technology industry is highly matched with the industry positioning of the Star Market.

At present, most of the enterprises accepted to list on the Star Market show the characteristics of “hard technology”. In addition, the 2021 guidelines make it clear that “financial technology and model innovation enterprises shall be restricted from being listed in the Star Market”; therefore, being accepted for listing on the Star Market by itself means that the hard technology characteristics of the enterprise is recognised by the regulatory authorities.

卢江霞, Lu Jiangxia, Senior partner, Jincheng Tongda & Neal
Lu Jiangxia
Senior partner
Jincheng Tongda & Neal

HKEX main board. The market has no special requirements in terms of industry. It has a lower listing threshold for biotechnology companies and innovative industry companies with some weighted voting rights (WVR). But it also has certain business/market value related requirements for them.

Unlike the Star Market, Hong Kong’s main board does not expressly “restrict” or “prohibit” enterprises from a certain industry from listing, which places relatively fewer requirements for new economy enterprises with unobvious hard technology characteristics, such as new consumption, new technology, internet enterprises, and some enterprises with red chip structures. Such enterprises are more suitable to go to the main board of the HKEX if they can obtain a better P/E ratio compared with mainland exchanges.

Since 2020, we have seen high-quality enterprises from different industries, such as Jiumaojiu (chain catering), Nongfu Spring (consumer goods), Smoore International (e-cigarette manufacturing), Joy Spreader Interactive (internet marketing), ERP (SaaS software), and JD Health (internet, health technology), seek a listing on the HKEX.

Differences in listing standards

The impact of different listing standards is also worthy of attention. Taking relevant rules for “secondary listing” for example, if a red chip company that has been listed overseas wants to issue shares or CDRs on the Star Market, it needs to meet either of the following conditions as specified in the Announcement on the Relevant Arrangements for Domestic Listings of Pilot Innovative Red-chip Enterprises:

. Its market value must be at least RMB200 billion (USD31 billion).

. Or, its market value is more than RMB20 billion, and it owns independently developed globally leading technologies, strong scientific and technological innovation ability and a comparative advantage in the same industry.

余峥, Yu Zheng, Partner, Jincheng Tongda & Neal
Yu Zheng
Partner
Jincheng Tongda & Neal

Obviously, if a red-chip enterprise listed overseas seeks to be on the Star Market, it must have a high market value if it does not have the characteristics of hard technology industry. However, few red-chip enterprises listed overseas meet this standard, showing that the standard is rather high.

The HKEX, however, sets the following conditions for applying for re-listing:

. Its market value is at least HKD40 billion (USD5.2 billion); or

. Its market value is at least HKD10 billion but its income in the latest audited accounting year is at least HKD1 billion. It must also be one of “the companies in the innovative industry”. And must be able to prove that the laws and regulations of the place of jurisdiction and the articles of association of the issuer meet certain levels of shareholder protection, including that the annual general meeting will be held every year, and conferring shareholders holding 10% or more of the voting rights the right to call an extraordinary meeting on the basis of one vote per share.

Compared with the Star Market, Hong Kong is more relaxed in terms of market value and requirements on industry, and explicitly allows enterprises with WVR to be re-listed.

These differences have meant that only Semiconductor Manufacturing International Corporation (SMIC), as a red-chip enterprise listed overseas, has achieved its secondary listing on the Star Market since 2020. Thirteen red chips completed secondary listings on the HKEX main board: Netease, Jingdong Group, YumChina, Huazhu Group, Baozun, GDS Services, New Oriental Education & Technology Group, Autohome, Baidu Group, BiliBili, ZTO Express, Zai Lab and Ctrip Group.

Conclusion

The different policy environments of the two places will guide different types of enterprises to choose which is suitable for them. Provided there exist differences in the above policy environments, it may be a long-term trend that hard technology enterprises will go to the Star Market and new economy enterprises will go to Hong Kong or the US stock market.


Liu Yinhong is a senior partner at Jincheng Tongda & Neal and the head of capital market practice. He can be contacted on +86 755 2223 5066 or by email at liuyinhong@jtnfa.com

Lu Jiangxia is a senior partner at Jincheng Tongda & Neal. She can be contacted on +86 10 5706 8081 or by email at lujiangxia@jtnfa.com

Yu Zheng is a partner at Jincheng Tongda & Neal. He can be contacted on +86 755 2388 4727 or by email at yuzheng@jtnfa.com