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Saturday, 18 November 2017

Financial Exchanges 2005 - London calling

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The London Stock Exchange has been aggressively marketing its services in China in a bid to poach business from the standard venues for offshore PRC equity issuance – the SEHK, NYSE and Nasdaq. So far the LSE has only managed to draw in a few small issuers that want to avoid the US’s burdensome compliance standards and the lengthy queue to list in Hong Kong, but interest in London is growing. Kevin Voigt reports.

When Asian Citrus Holdings looked at raising capital to expand its plantations in China, like many mainland Chinese firms the company first looked to the Stock Exchange of Hong Kong. Then in December last year, company officials got a surprise call from the London Stock Exchange, suggesting the company – the PRC’s largest provider of oranges to the mainland market – instead list on its Alternative Investment Market International (AIM) board.

“The first place we thought to get listed was Hong Kong because it was closer to us,” said Eric Sung, financial controller of Asian Citrus, which has offices in Hong Kong and more than 450 employees at its two plantations in Guangxi Zhuang and Jiangxi provinces. “But for the Hong Kong stock market, they had too many applicants for listing – many of the state-owned companies are coming to Hong Kong – and didn’t seem as keen to get small to mid-cap companies to list.”

Impressed by the LSE initiative, Sung and his company chairman, Tony Tung, travelled to London to meet with stock exchange officials and in August the company became the 11th Chinese small-to-medium size outfit to list on AIM since 2004. Its IPO raised £12m, the largest so far by a mainland company on AIM, which is geared toward smaller, faster growing companies.

The wooing of Asian Citrus to list in London is the latest in the stock exchange’s drive to attract Chinese companies. This is an attempt to chip away at the Hong Kong exchange’s long dominance as the preferred place for mainland companies to go for IPO, and part of the LSE’s long-term strategy to take a bite out of the supremacy of the New York Stock Exchange in global equities market. The push to grow its global reach in China, mirrored by similar marketing efforts in Russia and Eastern Europe, began in earnest in late October 2004 when the London Stock Exchange opened an Asian office in Hong Kong.

“If a company wants true globalisation, if you list in Hong Kong, you’re not truly international,” said Jane Zhu, managing director of LSE’s Asian office. “The Hong Kong market, sector-wise, is still very narrow and doesn’t have the liquidity of London.”

So far, the greatest Chinese success story on AIM has been the RC Group Holdings, a 70-employee software company that makes biometric security products such as thumbprint and retinal scans. The company’s share price has tripled since it listed in February 2004 to about 35p in August.

“For most Chinese companies, it’s natural to secure a listing in Hong Kong or Singapore . . . but unlike other companies, we have more of a global market in mind,” said Raymond Chu, RC Group chairman and CEO. “The delays in listing in Hong Kong or Singapore really scared us away . . . and London is big enough to allow enough liquidity. If you need funds and tell a good story, people are willing to give you money.”

The reasons for the pick-up in Chinese companies listing in London are straightforward, according to Richard Brown, a partner with Lovells in London who led the Asian Citrus listing.

“There is more conscientious marketing by the London Stock Exchange, who are very good at targeting certain sectors and informing what they have to offer, which they didn’t do as much in the past,” he said. “Also, the new regulatory issues in New York are a very onerous regime, and the LSE is much less onerous . . . and has more regulatory flexibility than even Hong Kong. Companies in the past almost automatically listed in the States, but companies now are really thinking hard to see if that makes sense.”

The Sarbanes-Oxley Act of 2002 has significantly increased the reporting requirements and liabilities executive management faces for fraudulent filings, and has been a key marketing point for the LSE in trying to attract Chinese companies. “With Sarbanes-Oxley, I think [NYSE listing] has become 'Mission Impossible' for Chinese companies,” Zhu said.

That said, London does not have the liquidity of the US, nor does it have the cachet of an NYSE or Nasdaq listing.

And the LSE still faces an uphill battle against the Hong Kong exchange. PRC firms still view Hong Kong as a home listing. Hong Kong has the advantage of existing in the same time zone as China, and the territory is filled with analysts, bankers and fund managers who speak Chinese languages and are intimately familiar with the Chinese issuers’ brands and services. Hong Kong also has the critical mass to claim its place as the PRC issuers’ exchange of choice.

The LSE is still at least two years from opening an office in mainland China, where the Hong Kong Stock Exchange has had an office since 2003, and recently got approval to base representatives in Shanghai and Guangzhou.

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