Hong Kong's RMB/HKD equity placement first analysed

Author: Ashley Lee | Published: 7 Nov 2012
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Hopewell Highway Infrastructure’s (HHI) share placement marked the Hong Kong Stock Exchange’s (HKEx) first dual counter equity security. Its novel structure paves the way for Hong Kong-listed companies to access renminbi (RMB) investors.

Although Hong Kong’s equity capital markets have been quiet this year with only one initial public offering (IPO) since July, this issue represents a new way for HK-listed companies to attract Chinese investors.

Listed on October 29, the security is fully convertible between HKD and RMB. In a statement, HKEx Chief Executive Charles Li said that HKEx expects interest in RMB products to continue to grow with the increasing internationalisation of the RMB.

Freshfields’ Charles Ching, who advised placing agent BOCI Asia, said the deal enhanced Hong Kong’s position as the leading offshore RMB centre. "It represents a further diversification of RMB products available to investors, and provides issuers with a new capital raising model," he said.

Ching added that the HHI placement may be an especially attractive capital raising model for issuers that have their main business operations in mainland China, as they would be able to raise capital in their operating currency.

The RMB/HKD transfer mechanism

But deal counsel had to educate investors about the transfer mechanism between the RMB and HKD shares, for which technicalities and the relevant disclosure had to be extensively discussed.

It was also essential to ensure liquidity in the RMB tranche, price equality between the RMB and HKD tranche and maintain equal treatment of shareholders.

To do so, issuers need to focus on making sure that RMB and HKD traded shares are identical in all respects, including shareholder rights, to ensure full transferability between RMB and HKD shares, commented Ching.

Equity capital markets have recently slowed in Hong Kong – the October HKEx-listing of Fosun Pharmaceuticals was the first since July and tumbled on its debut. Nonetheless, deal counsel said that the placement could encourage issuers in the city looking for new capital, or investors looking to diversify their holdings.

"Currently there is a sizeable RMB pool in Hong Kong with relatively few products to invest in," said Ching.

Indeed, dual-counter equities could be the next logical development in Hong Kong’s growth as an international financial centre: aside from attracting RMB investors, it reasserts its place as the leading offshore RMB centre.

RMB and HKD-denominated equities have proven popular as Hong Kong’s IPO market remains quiet. Before the HHI share placement the HKEx saw the listing of the first dual-counter ETF on October 12, the Harvest MSCI China A Index ETF.

But there are concerns about RMB-denominated offerings as the Chinese economy slows. In a transaction that was meant to demonstrate Singapore’s up-and-coming status as an offshore RMB hub, Hong Kong tycoon Li Ka Shing’s Dynasty Reit announced a RMB IPO on the Singapore Exchange in late October. However that transaction was pulled due to poor market conditions.

See also

'The changing role of cornerstone investors in Asia’ http://www.iflr.com/Article/3108362/The-changing-role-of-cornerstone-investors-in-Asia.html

'Shanghai’s MNC policy reveals RMB convertibility plans’ http://www.iflr.com/Article/3104912/Search/Results/Shanghais-MNC-policy-reveals-RMB-convertibility-plans.html?PageId=201737&Keywords=hong+kong&OrderType=1

'China Nonferrous Mining IPO explained’ http://www.iflr.com/Article/3066972/China-Nonferrous-Mining-Corporation-IPO-explained.html