Bankers Loving the Boom Are Missing the Profits

(Bloomberg Opinion) -- Bankers hoping for a bonanza from Hong Kong share sales by U.S.-listed Chinese companies should contain their excitement. Low fees and the hangover of the Luckin Coffee Inc. scandal are likely to put a damper on the rewards.

Hong Kong’s market for stock offerings is booming. Online retailer JD.com Inc. is raising as much as $4.1 billion in the world’s second-biggest share sale this year, days after internet gaming company NetEase Inc.’s $2.7 billion listing. There’s a line of candidates for Hong Kong flotations, driven by the prospect that the U.S. will delist companies that can’t commit to proving they are free from foreign government control.

That’s a boon for the city and its stock-exchange operator, after China’s plans to impose a national security law raised questions over Hong Kong’s future as an international financial center. The NetEase and JD.com offerings were both heavily oversubscribed by retail and institutional investors, showing the strength of demand for U.S.-traded Chinese tech companies. These and upcoming deals may not deliver the windfall to investment bankers that such a pipeline would usually promise, though.

For one thing, secondary listings earn a lot less in fees than initial public offerings. NetEase is paying the banks that worked on its Hong Kong flotation just 0.25% of the proceeds, compared with a standard rate for IPOs of 2% to 3%, as my colleague Julia Fioretti notes. Such deals earn less because the companies are already listed, meaning less work is required from banks to introduce their businesses to investors.

Secondly, not all companies eligible to sell shares in Hong Kong can be expected do so. There are 42 Chinese companies in the U.S. that qualify for Hong Kong secondary listings, according to analysts at UBS Group AG. Should they issue 5% of their stock over the next 12 months, that would mean $27 billion in funds raised.

The actual amount may come in far short of that. Blame the fall of Luckin, the Starbucks competitor that faces delisting from Nasdaq after acknowledging that it fabricated sales. The episode has damaged the reputation of Chinese companies overseas and is having a cautionary impact on investors, banks and potential listing candidates.

Unlike Hong Kong, the U.S. market has a disclosure-based system that makes listing — and delisting — easier. Investors subject to corporate fraud can seek redress through class-action lawsuits (Luckin and its IPO arranger, Credit Suisse Group AG, have both been sued). Lacking such legal safeguards, Hong Kong has a gatekeeper for its market, with regulators vetting listing candidates. Companies and their sponsoring banks need to factor in this added scrutiny.

As for investors, they may feel they’ve already had the pick of the U.S.-listed Chinese contingent. Alibaba Group Holding Ltd., the first to sell shares in November, JD.com and NetEase are three of the four biggest by market capitalization (the other is Pinduoduo Inc.). They are all well known and with track records as listed companies stretching back years. As the list goes down to encompass smaller and lesser-known enterprises, investor enthusiasm may wane.

Not all businesses can match the excitement of the tech trio. Will investors flock to Yum China Holdings Inc., operator of KFC outlets in the country, for example? American investors have taken to Yum, which has the highest percentage of U.S. institutional ownership among the group. This investor base may be unwilling to switch to Hong Kong shares, a factor that may affect demand and post-listing liquidity.

Then there’s online travel agency Trip.com Group Ltd., also on the roster of upcoming secondary listings. It has the technology sheen, but will investors be able to overlook the hammering that the world’s tourism companies have taken from the coronavirus pandemic?

The reality is that while secondary listings are good business, “there are bigger opportunities in other products for investment banks in the region,” according to Amrit Shahani, London-based research director at analytics company Coalition Development Ltd. First-quarter IPO fees for the top 12 investment banks that Coalition follows in the region, from Goldman Sachs Group Inc. to Citigroup Inc., were around $150 million, Shahani said; they made a combined $1.5 billion from foreign-exchange trading during the period.

So things are looking up after all. Just not in the place you might expect.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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