China Railway signals Hong Kong
direction By Wu Zhong, China
Editor
HONG KONG - A term frequently used
about the local stock market is "A-sharization",
referring to the Hong Kong bourse becoming
increasingly like mainland China's
yuan-denominated A-share market. It remains an
open question whether this growing similarity is a
good thing in the long run for a Hong Kong market
traditionally more closely linked to international
business.
In any case, A-sharization seems
to be the trend, as more mainland Chinese
enterprises become dual-listed at home and in
Hong
Kong. Increasing numbers of H-share companies,
businesses based in the mainland and listed in
Hong Kong, want to make A-share initial public
offerings (IPOs) in Shanghai because prices there
are much higher. Not only that, even red-chips,
mainland companies incorporated overseas and
listed in Hong Kong, are planning to return home
despite Beijing’s policy of still banning overseas
companies from listing in China.
Adding to
the trend, some locally listed Hong Kong
companies, such as Bank of East Asia, have
expressed interest in issuing A shares, perhaps
not surprisingly as more Hong Kong enterprises
such as property developers, banks and services
providers become increasingly reliant on the
mainland for their business expansion.
A
remarkable feature of A shares is that they are
trading at high prices. At the current level, A
shares are trading at an average price of more
than 40 times their earnings (in some cases, the
price/earning (P/E) ratios are in the hundreds),
leaving H shares at big discount to their A-share
counterparts. This explains why so many Chinese
companies already listed in Hong Kong are so eager
to issue A shares to raise more funds.
As
a result, Chinese companies are increasingly
selling their shares in two markets at two
different prices - that of A shares and that of H
shares. Because of the price differences, Hong
Kong investors and Chinese funds legally or
illegally flowing into Hong Kong have been buying
in H shares hoping to profit from bets that the
price differences between the two kinds of shares
would gradually narrow. This has helped to drive
P/E ratio of H shares higher and higher.
Another feature of the A-share market is
that it is still largely closed to the outside
world due to the inconvertibility of the Chinese
currency, and is thus comparatively short of value
investors. Instead, it is dominated by first-time
retail investors who want to make quick money.
Hence it is quite speculative compared with more
mature markets.
The A-share market is also
very vulnerable to any change in central
government policy, with any policy change or even
a rumor of change liable to cause sharp price
fluctuations. That now seems increasingly to be a
feature of the Hong Kong bourse. In mid-August,
news about Beijing’s plan to let individual
mainland residents trade directly in Hong Kong
stocks immediately reversed the then downturn
trend in the market, boosting the benchmark Hang
Seng Index by 40% in the following weeks. When
Chinese Premier Wen Jiabao, during his visit to
Russia in early November, then announced a halt to
the plan pending an evaluation of the risks
involved, the Hang Seng began to dive, shedding
some 5,000 points, or more than 15%, so far.
Now a policy change by Beijing looks set
to speed up the A-sharization of the Hong Kong
bourse. According to Shanghai-based China Business
News, the China Securities Regulatory Commission
(CSRC) is encouraging state-owned enterprises
planning a dual listing to launch their A-share
IPO first before they sell H shares in Hong Kong.
So far, such dual-listings have tended to
be the other way around. That is, the mainland
companies would issue H shares in Hong Kong first,
then sell A shares in Shanghai. Even in cases of
simultaneous A-share and H-share IPOs, it has
always been the case that H shares would be priced
first, then A shares would follow. An example is
the dual listing of the Industrial and Commercial
Bank of China, the country’s largest state-owned
lender, in October last year.
What is the
meaning of this policy change? From now on, H
shares of new IPOs will be priced like A shares,
this is, much higher given the higher P/E ratio of
the Chinese market. As Chinese enterprises are now
the major source of IPOs for the Hong Kong bourse,
this means Hong Kong will have to accept the fact
that more new shares will be traded at higher
initial prices. This will inevitably draw Hong
Kong stock market ever closer to Shanghai, unless
Hong Kong can lure more companies from other
countries or regions for listing.
''Previously, state-owned enterprises
loved to list in Hong Kong because A shares prices
were too low. But the situation now is reversed.
The P/E ratio of the A-share market is very high
and (mainland) investors are willing to subscribe
to high-priced shares. The A-share market is so
good now that there is no reason not to keep most
of the [IPO] shares at home,'' a CSRC official was
quoted by China Business News as saying.
The official added that it was hoped that
A-share-first dual IPOs would become the norm for
state firms. The regulator also hoped that a
dual-listing firm would issue more A shares than H
shares.
China Railway Group, now in the
process of a dual listing in Shanghai and Hong
Kong, is the first test of the new policy. On
November 5, the CSRC approved the company's
A-share IPO application. Days later the Hong Kong
stock exchange also gave the green light for the
company’s H-share IPO. China Railway plans to
issue 4.676 billion A shares and 3.326 H shares to
raise up to US$5.5 billion. The company has said
it would price its H shares a bit higher than the
A shares because ''there is no reason for us to
start selling H shares cheaper than A shares.''
The company priced the A shares at 4.8
yuan (HK$5.04, or US$0.65) each, a P/E ratio of
more than 40, after mainland investors put in
subscriptions worth 3.3 trillion yuan, an IPO
record.
Subscriptions for the H-shares
began last Friday, with the offering price to be
set between HK$5.03 and HK$5.78. Given the zealous
oversubscription, it is almost certain that the H
shares will be sold at the top end and at a price
significantly higher than that of the A shares.
They begin trading in Hong Kong on December 7,
four days after the A-shares debut in Shanghai.
In sharp contrast, PetroChina prices its
A-shares in an IPO in early November at 16.7 yuan
each, or about 20 times its earnings, a slight
discount to the average trading price of its H
shares at that time.
Following China
Railway Group, Shanghai-headquartered China
Pacific Insurance Co will likely be the second
company to mark its dual IPO by issuing A shares
first.
Hua Sheng, president of
Beijing-based Yanjing Overseas Chinese University,
was quoted as saying: ''This [A-share-first dual
listing] is a quiet yet very significant reform in
the [mainland] share issuance system.''
We
may also add that this is also a quiet reform for
the Hong Kong stock market and its share issuance
system, for better or for worse. An increasingly
A-sharized Hong Kong stock market may become less
attractive to international value investors, but
as long as mainland funds can keep pouring in to
push the Hang Seng Index higher, Hong Kong's small
investors are happy.
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