HK Nets Another High-Tech IPO
Hong Kong’s stock exchange looks set to snare another Chinese high-tech IPO, with media reports that a unit of Sinosoft Technology is planning a relatively large offering in the market. The reports, if true, would mark yet the latest sign of a shifting tide that could see more Chinese high-tech starts-ups list in Hong Kong as they eschew their previous favorite destinations on stock exchanges in New York.
From my perspective, this development does indeed look positive as I honestly believe that investors in Hong Kong are more likely to understand and appreciate big Chinese tech names. Companies like Sina (Nasdaq: SINA) and Baidu (Nasdaq: BIDU) are household words to most people in this part of the world, unlike the US where most are relatively unknown. That lack of familiarity means that many investors who buy these Chinese tech firms in the US are often short-term traders like short sellers and hedge funds, which are more interested in quick rises and falls in the companies’ share prices rather than their longer-term growth stories.
According to the latest headlines, which cite unnamed sources, the Sinosoft unit called Skytech hopes to raise about $60 million through its offering, and will begin taking subscriptions this week. (English article; Chinese article) Nanjing-based Skysoft is a developer of software for exporters, and is 25 percent owned by e-commerce giant Alibaba. The deal is being underwritten by CICC and China Merchants Bank, which isn’t surprising as both are familiar with the Hong Kong market.
This deal is relatively small as high-tech IPOs go, and clearly the most significant thing about it is that it’s happening in Hong Kong instead of on the New York Stock Exchange or Nasdaq, where the vast majority of China tech firms are listed. We saw similar signals emerge in March, when specialty e-commerce site Cogobuy said it wants to make an IPO in Hong Kong next year rather than in New York. (previous post)
To date, the only really major Chinese tech firm now listed in Hong Kong is Internet giant Tencent (HKEx: 700), which went public there in 2004. Of course anyone who knows the China Internet industry will know that Tencent’s fortunes and its shares have soared since then, with the company’s stock now trading at about HK$300, some 80 times its IPO price of HK$3.70.
The only other major tech firm to list in Hong Kong was Alibaba’s B2B e-commerce site, Alibaba.com. But that listing didn’t fare as well, and Alibaba.com was privatized last year at the same price as its original IPO. Recent reports have indicated that the parent company Alibaba Group may also be considering Hong Kong as the main site for its upcoming blockbuster IPO, which would be a huge boost for the market.
Skytech’s choice of Hong Kong for its IPO comes as US-listed China tech firms face a prolonged downturn that is now entering its third year. That downturn was initially sparked by a series of accounting scandals that resulted in a broader clean up of the sector. Only a handful of Chinese tech firms have listed in New York since then, and many wonder if strong investor interest will ever return to the market.
One of the biggest drawbacks to Hong Kong right now is its rule that all companies that list there must show 3 years of profits before their IPOs — a requirement that would rule out many Chinese tech firms. Still, the growing attractiveness of the market could lead more Chinese tech companies to delay their IPOs to meet this profitability requirement, and I would expect to see an increasing number of firms taking this option in the next few years.
Bottom line: Skytech’s choice of Hong Kong for its IPO reflects the market’s growing attraction for Chinese tech firms, which is likely to accelerate in the next 2 years.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.
