NetEase's US$3 billion Hong Kong secondary listing looks like a done deal amid strong demand from investors

Chinese gaming giant NetEase has already amassed enough pledges from investors to cover its secondary listing in Hong Kong and could close the share offer on Thursday, according to people familiar with the matter. Investors' take-up of the sale bodes well for e-commerce giant JD.com as it prepares to launch its offering on Monday.

NetEase and JD.com are racing to complete their secondary listings this month amid strong demand among investors for technology listings and before the US stance on Chinese companies trading on its markets hardens further.

US President Donald Trump is dialling up anti-China rhetoric ahead of seeking a second term in November, pushing more Chinese technology firms to consider a secondary-listing closer to home. Hong Kong's exchange is putting on a full-court press to attract them.

"US-listed Chinese companies are concerned that Washington would place even more scrutiny on them if President Trump successfully wins a second term," said Alvin Cheung, associate director at Prudential Brokerage based in Hong Kong.

JD.com is planning to raise between 4 per cent to 5 per cent of its market capitalisation ahead of a secondary listing on Hong Kong's main board slated for June 18, according to a separate source. Based on its US market cap, that works out to about US$3.2 billion to US$4 billion.

NetEase is looking to raise US$2.6 billion, which could rise to US$3 billion if an overallotment option is exercised, according to a deal terms sheet. The deal is almost entirely aimed at international investors with just 3 per cent reserved for a Hong Kong public offer. Barring any last-minute hiccups, NetEase will close the books on its international offer at 4pm in all regions and on Friday for the Hong Kong public offer. It will price at 10am Hong Kong time the same day, the sources said.

Combined, these two deals could raise up to US$7 billion and propel Hong Kong up the rankings of global exchanges by IPO volume. Add in other smaller IPOs that are expected to launch this month, and Hong Kong could close in on the Shanghai Stock Exchange, the global leader in terms of fundraising as of the first quarter.

For the first five months of this year, companies raised US$3.37 billion on the Hong Kong stock exchange from 52 IPOs, compared to US$11.83 billion from 60 IPOs on the Shanghai Stock Exchange, data from Refinitiv shows. If JD.com and NetEase successfully complete their offerings, it would help Hong Kong narrow its US$8.46 billion deficit with Shanghai as of end May.

Hong Kong's winning streak could extend into the second half of the year as other US-listed Chinese companies are also mulling secondary listings in the city, including internet and artificial intelligence giant Baidu as well as catering group Yum China.

Hong Kong was the world's top IPO exchange last year, but dropped to fifth place in the first quarter.

Liu Qiangdong, also known as Richard Liu, CEO of JD.com, celebrates the IPO on Nasdaq on May 22, 2014. Photo: AP alt=Liu Qiangdong, also known as Richard Liu, CEO of JD.com, celebrates the IPO on Nasdaq on May 22, 2014. Photo: AP

JD.com's Hong Kong offering comes as its Nasdaq-listed American depositary shares hit a record high of US$55.53 on May 18, after listing in the US in 2014. The stock has risen 55 per cent year-to-date. The pricing of its stock in the Hong Kong secondary listing will be set in reference to its US shares.

NetEase will set the price for its international tranche with reference to the price of its ADRs, which closed on June 2 at US$408.65 each. It has set the maximum offer price for its Hong Kong public offer at HK$126 each. It is due to list on June 11.

NetEase CEO William Ding Lei. Photo: VCG via Getty Images alt=NetEase CEO William Ding Lei. Photo: VCG via Getty Images

Investors' demand for IPOs was strong in May, particularly for the health care and technology-related sectors. One example is the over 1,100-time oversubscription attracted by Peijia Medical, a Suzhou, Jiangsu province-based medical device maker that made its debut on May 15.

In May, across the eight new listings on the main board, all, except interior design provider Raffles Interior, closed higher than their IPO prices on the first trading day. This was despite the Hang Seng dropping 6.8 per cent in May.

Charles Li Xiaojia, HKEX CEO, has rolled out the welcome mat for US-listed Chinese companies. Photo: Jonathan Wong alt=Charles Li Xiaojia, HKEX CEO, has rolled out the welcome mat for US-listed Chinese companies. Photo: Jonathan Wong

Last month, in an attempt to fence off Wall Street from Chinese companies, the US Senate passed an unprecedented bill which requires foreign companies to submit audits for inspection by the Public Company Accounting Oversight Board, the non-profit body that oversees audits of all US companies in public markets.

A failure to provide the information for three straight years would lead to the delisting of a company's shares. The bill still needs to pass the House of Representatives before it can be signed into law by the US president.

Also, Nasdaq has proposed changes for new listing applicants, requiring at least US$25 million minimum fundraising for companies to be eligible for a listing. Accounting scandals involving Chinese companies, such as that of Luckin Coffee which faced a delisting after its disclosure of sales fabrication, has spurred the exchange to tighten its rules.

There are 195 Chinese companies trading on the New York Stock Exchange and the Nasdaq, with a combined market capitalisation of US$1.1 trillion, according to Bloomberg data. Among the top five, only Alibaba Group Holding, which owns the South China Morning Post, has a secondary listing in Hong Kong.

HKEX is also moving to make it easier for high-growth Chinese tech companies to float shares in the city. The bourse last week began collecting public comments on a proposal that would allow the listings of a wider array of companies with a dual-class shares structure. Applicants that have corporate shareholders with weighted voting rights will probably be qualified for listings in the future, while the current rule limits the right to only founders and key staff.

Amid heightened US-China geopolitical tension, the line of Chinese firms seeking a listing in Hong Kong would grow longer, said Prudential's Cheung.

"It would make sense for companies to complete their fundraising before the second half of the year, to avoid tapping a market that could be overcrowded by sizeable deals or issuers that are expected to attract strong demand," said Cheung.

Additional reporting by Chad Bray

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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