Singapore companies are continuing to list in Hong Kong, drawn by the hope of better liquidity and higher valuations. Are they really better off there? What can Singapore do to raise its game?

SINGAPORE (Apr 9): Mark Liew, chief operating officer at PrimePartners Corporate Finance (PPCF), recalls some of his friends talking excitedly about having bought shares in Razer when the maker of computer gaming accessories got listed in Hong Kong in November last year. Knowing his friends typically invested in profitable, dividend-paying stocks in Singapore, Liew tried to warn them that Razer had a far more risky profile. “Eh, loss-making,” he said. But his friends were not deterred. “Yah, yah, I know, but Hong Kong lah,” one of them replied.

“If Razer came to Singapore, they wouldn’t say that,” Liew says. Co-founded by Singaporean Tan Min Liang, Razer sold shares in an IPO in Hong Kong at HK$3.88, putting the company’s value at HK$35 billion ($5.9 billion). Buoyed by a retail over-subscription rate of 290 times, the stock quickly hit HK$5.49 on its trading debut on Nov 13 before closing at HK$4.58. But Liew’s scepticism about the sustainability of this valuation was not unfounded. Shares in Razer have since tumbled nearly half from their peak, to trade at 25.7% below its IPO price as at March 29.

Still, the fact that a hot technology company like Razer, which has headquarters in Singapore and San Francisco, chose to be listed in Hong Kong, and achieved a lofty valuation when it initially hit the market, continues to burnish Hong Kong’s reputation as a capital-raising centre. And, while Singapore has established itself as a leading listing venue for real estate investment trusts, it is continuing to lose listings of growth-oriented companies to Hong Kong.

Now, as economic growth and capital-raising activity pick up across the world, competition between the stock exchanges of Singapore and Hong Kong is likely to remain intense. Last year, there were 25 new listings on the Singapore Exchange — about twice the number in 2016. Yet, in the same year, there were 17 companies based in Singapore — including Razer — that chose to go public in Hong Kong instead of their home market.

Three of these 17 companies — LHN, ISDN Holdings and Centurion Corp — already had a listing in Singapore but still opted for a listing in Hong Kong. Eight of the remaining 14 Singapore companies that were listed in Hong Kong last year chose to do so on the Growth Enterprise Market, or GEM. In the first six weeks of this year, another four local companies have opted for an IPO in Hong Kong. Two more — CNMC Goldmine Holdings and Singapore Kitchen Equipment — have announced plans to do so too.

To be sure, Singapore companies should not be expected to get listed in their home market if their capital-raising needs are better served elsewhere. Indeed, Singapore investors are themselves becoming more internationally minded, and using local trading and wealth management platforms to obtain exposure to a vast array of opportunities overseas. “If the market is not as liquid [in Singapore], if I think I can get a better valuation [and] more investor interest in another market, why wouldn’t I explore that?” says Liew.

Carol Fong, CEO of brokerage firm CGSCIMB Singapore, observes that as recently as five years ago, more than 90% of a Singapore client’s trades would have been in local stocks. Now, about 30% of the trades are in US or Hong Kong stocks. “Trends and appetites have changed. Investors are now a lot more educated; they see what’s happening in the world,” she says.

The attraction of Hong Kong is that it is a hub for Chinese capital, and its stock market offers plenty of opportunity to gain exposure to China’s growth potential. “Ultimately, Hong Kong is seen as a proxy for China,” says Goh Tee Leng, fund manager at Heritage Global Capital Fund. By contrast, the Singapore market is viewed as a proxy for its own local economy, he adds. “Therefore, most of the capital flow would be to Hong Kong rather than to Singapore, resulting in better liquidity and valuations.”

As it is, Hong Kong has a far wider and deeper market than Singapore by most measures. At end-2017, there were 2,118 companies listed in Hong Kong with a total market value of HK$34 trillion. There are 746 companies listed in Singapore with a combined market value of around $1 trillion. The average daily value of securities traded in Hong Kong during the year was HK$88.3 billion, or $14.8 billion, more than 10 times SGX’s $1.1 billion for the financial year ended June 2017. And, there are more than 622 brokerages licensed to trade securities in Hong Kong, versus about 26 securities trading members in Singapore. But have Singapore companies that ventured to Hong Kong for listing actually benefited from lasting premium valuations? Is there a downside to going public in Hong Kong? What sorts of companies do well?

A mixed bag

Certainly, there are plenty of examples of Singapore companies that garnered massive market values immediately after getting listed in Hong Kong. But their share prices have typically been very volatile. And, the premium valuations have not always lasted (see accompanying table).

For instance, board games maker CMON, which sold shares at an IPO at 23 HK cents, saw its stock price hit HK$3.29 at its trading debut on Dec 2, 2016. Ng Chern Ann, founder, chairman and CEO of the company, was worth a cool HK$2 billion during the weekend that followed. But the euphoria did not last. By Dec 23, 2016, shares in the company behind games like Zombicide had crashed to 18.5 HK cents. On March 29 this year, the stock closed at 23.2 HK cents, which is an unremarkable 15 times earnings. The market value of Ng’s 609.2 million shares was HK$140 million.

A more recent example would be property management firm LHN, which sought a listing in Hong Kong last year partly because of its business expansion plans. The company has been acquiring rights to manage car parks in Hong Kong, and is planning to expand into the co-working space market in China. The company sold shares at its IPO at HK$1.90. On Jan 4, its fourth trading day on the Hong Kong bourse, the stock hit a high of HK$4.81. By March 29, the stock had collapsed to HK$1.

Some Singapore companies that have listed in Hong Kong have not displayed such extreme volatility, though. BOC Aviation, which was the former Singapore Aircraft Leasing Enterprise before it was bought by Bank of China, has been on a gentle upward climb since its listing in June 2016. With a market value of HK$32.4 billion, BOC Aviation is also currently the largest of the Singapore companies to have recently been listed in Hong Kong. Shares in BOC Aviation are also trading at a seemingly reasonable seven times earnings, and offer a fairly high yield of 7%.

There is actually a wide variation in valuations across the Singapore companies that were listed since 2016. At one extreme is Anacle Systems, which is involved in energy management systems. Its shares are trading at 478.6 times earnings. Other richly priced counters include luxury car servicing provider Zheng Li Holdings, which is trading at 325.6 times earnings; building contractor Kakiko Group, which is trading at 179.6 times earnings; and road works contractor Shuang Yun Holdings, which is trading at 100.6 times earnings. Then, there is HR service provider SingAsia Holdings, which commands a market value of more than HK$6 billion despite making a loss recently.

At the other end of the spectrum are the likes of seat-belt maker TOMO Holdings, which is trading at just 2.8 times earnings. There is also asset manager ZACD Group, which is trading at 5.5 times; precision engineering and power company ISDN Holdings, which is trading at 8.6 times; and earthworks contractor Chuan Holdings, which is trading at 8.9 times.

One interesting phenomenon of Singapore companies that were listed in Hong Kong recently is that a good number reported losses shortly after hitting the market, because of the cost of their IPO. Among them is GT Steel Construction Group, which has the smallest market value in the segment, of just HK$136.8 million. For FY2017 ended Dec 31, it reported a 21% rise in revenue of $27.9 million and net loss of $411,000, versus earnings of more than $3.2 million the previous year. Among its cost items was listing fees of nearly $3.9 million.

Elsewhere, logistics company C&N Holdings said it incurred listing expenses of $3.11 million in FY2017 ended Dec 31, which led to a loss of $406,000. Excluding the listing fees, the company would have reported earnings of $2.7 million, versus $3.3 million for FY2016. Similarly, HR service provider Omnibridge Holdings attributes the losses of $1.3 million in FY2017 ended Dec 31 to listing expenses of $1.7 million. If that one-off fee is stripped out, the company would have been $400,000 in the black, compared with earnings of $1.4 million for FY2016.

IPO fees are, of course, a non-recurring expense. And, they could be well worth it if they enable the company to garner a sustainably high valuation, which is often the aim of Singapore companies pursuing a Hong Kong listing. In its prospectus, GT Steel said that the sector valuation for engineering and construction companies listed in Hong Kong averaged 94.7 times, versus a mere 12.1 times in Singapore.

Expensive proposition?

For companies that fail to attain a good valuation in Hong Kong, the higher cost of going public would seem to be a drawback. IPO expenses in Hong Kong can be twice Singapore’s. Companies that seek a listing in Hong Kong while maintaining listed status in Singapore are taking on an even more expensive proposition, with very little guarantee of a return.

“When it comes to the capital market, there is no guarantee that issuers will enjoy higher valuations and trading volumes when they dual-list,” says Ong Hwee Li, CEO of SAC Capital. The annual listing fee for the Hong Kong Main Board is a minimum of HK$145,000 a year for companies with a market value of HK$200 million or less. Those with a market cap of more than HK$5 billion are subject to an annual listing fee of HK$1.2 million. SGX’s Mainboard listing fee is comparable, at between $35,000 and $150,000.

SAC Capital’s Ong says any company contemplating a ‘list and sell’ strategy must be mindful of execution risks

For companies that genuinely want to raise equity capital, rather than simply obtain a better valuation, the cost of seeking a listing in Hong Kong ought to be measured against the cost of raising funds in their home market. According to some corporate finance professionals, issuing new shares in Singapore can be expensive. Besides the cost of placing out new shares, shares also tend to be issued at a discount of about 10% to their prevailing market price. “You hardly see a secondary fund raising at a premium to the market price,” says PPCF’s Liew.

Is the cost of raising equity ultimately worth it? Why is the cost of an IPO in Hong Kong higher than in Singapore? Is the big run-up upon listing worth the higher fees in Hong Kong?

Speaking on the record, many people in the corporate finance trade say it is the capital requirements and micro fundamentals of individual companies, rather than the market where they list, that ultimately drive fundraising decisions as well as valuations. And, IPO fees in Hong Kong tend to be higher because of generally higher salaries and rents in that market.

However, casual conversations and news reports suggest that the explosive trading debuts of stocks in Hong Kong are often the result of manipulation, which has been useful in drawing listing aspirants. Some also suggest that many listings in Hong Kong are really “shell planting” exercises, where there is a pre-existing agreement for the listed company to eventually be turned into a reverse takeover vehicle. By some accounts, such exercises can yield millions of dollars in profits for owners of even very small companies that go public in Hong Kong.

The Edge Singapore has not been able to find any hard evidence of these practices. And, there is nothing to say that such activities do not happen in Singapore too. But companies pursuing such strategies face significant risks, says Ong of SAC. “Any company contemplating a ‘list and sell’ strategy must be mindful of execution risks such as investigations [and] changes in rules.”

Enlarging the pie

So, is Singapore doomed to play second fiddle to Hong Kong as a capital-raising centre? What can it do to create a livelier stock market and attract more listings?

You Weiren, senior analyst at iFast, notes that SGX has been pursuing several initiatives to maintain and improve its competitive position. It is moving towards allowing companies with dual-class shares to be listed, which might attract promising young technology companies. SGX has also introduced shorter settlement periods and is looking into creating a stock trading link with Bursa Malaysia. “SGX is certainly not going down without a fight,” says You.

With major economies around the world now experiencing a rare period of synchronised growth and capital-raising activity beginning to take off, Singapore’s corporate finance players should focus less on competing with one another and more on growing the overall industry pie, according to Liew. “If you are not going to grow the pie, then good luck killing one another.”

The way Liew sees it, Singapore does not have a local economy that is large enough to constantly spawn sizeable public-listed companies. It also cannot compete directly with New York, London and Hong Kong for the biggest global IPOs. But it could create a niche for itself by focusing on relatively young companies looking to raise their first round of equity capital from public investors. Over time, these companies might well choose to move on to a bigger market, Liew explains.

Among the companies that PPCF has brought to Singapore is The Trendlines Group. The Israeli company identifies and incubates innovation- based medical and agricultural technology companies, each of which it may subsequently exit through an IPO or sale. More recently, PPCF oversaw the listing of Memories Group, a tourism-focused company based in Myanmar that was spun out of Yoma Strategic Holdings.

Meanwhile, some players in the sector have merged to strengthen their competitive position and provide better service to their clients. In 2016, SAC Capital acquired its competitor Canaccord Genuity, which increased its headcount by around one-third. As a result of the acquisition, SAC now owns a bigger portfolio of continuing sponsorship clients, which gives it a bigger stream of recurring income.

SAC’s CEO Ong says the combined firm is selective in taking on new business, focusing on clients where there is assurance of a sustained relationship. Some of the about 10 IPO deals that Canaccord had in the pipeline are not being pursued. SAC has also set up a team of analysts to produce research on its clients, to ensure they remain engaged with the market after listing. “We’re really putting in the resources to do the work,” says Ong.

Khong Choun Mun, CEO of RHT Capital, suggests that more foreign sponsors should be attracted to function in Singapore. By doing so, they will bring in companies from their home markets to be listed on SGX. “Those sponsors will help the Catalist market grow faster and diversify more,” he says.

RHT Capital’s Khong suggests that more foreign sponsors should be attracted to function in Singapore

Elsewhere, some brokerages have expanded their regional footprint. On Jan 18, leading Chinese brokerage China Galaxy Securities Co completed the purchase of its 50% stake in CIMB Securities International. The new entity, called CGS-CIMB Securities, excludes CIMB Securities offices in Malaysia, where the deal is still pending regulatory approval. According to Fong, CGS-CIMB is in a good position to capture the two-way flow of capital between China and Asean.

Does such a joint venture have a real advantage when just about every brokerage firm already offers investors online access to key regional markets? Fong likens the CGS-CIMB partnership to a marriage rather than a casual romantic relationship. “With a boyfriend, you can bed many different partners, the commitment and confidence created in the investing public are a bit different. Whereas if you are wedded to a husband, the commitment to make it work, the trust, the confidence level are a lot stronger,” she says.

CGS-CIMB Singapore’s Fong says the company is in a good position to capture the two-way flow of capital between China and Asean

CGS-CIMB aims to boost its regional business not just in trading but also corporate advisory work. For example, CIMB managed the demerger and listing of Xinghua Port Holdings in Hong Kong early this year. Now, as Chinese companies acquire assets in Asean, Fong figures that CGS-CIMB will be in a strong position to help some of them get listed in the region. “The natural sequence of events would be that if they own Asean assets, they would want to be listed somewhere in the Asean region. So, it is not a question of, say, Chinese companies that can’t get listed in Hong Kong or China coming to Singapore. If they have Asean businesses, it makes sense to get listed [in Singapore],” she says.

Indeed, if the capital market activity across the whole region fires up, the long-standing competition between Singapore and Hong Kong might be viewed in a different light, with the gains made by one not necessarily coming at the expense of the other.

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