Winton Dong

    dht620@sina.com

    DALIAN Wanda Commercial Properties (03699.HK), owned by Wang Jianlin, China’s richest man, announced its delisting plan from the Hong Kong stock market in March this year. According to a Reuters report last month, the real estate developer is considering a backdoor listing in Shanghai, which refers to the practice of buying a shell company as a way to establish a listing.

    Wanda Properties is not the only Chinese company planning to drop out of the Hong Kong bourse. Since November last year, at least 10 mainland companies with Hong Kong listings, including New World China (00917.HK) and Dongpeng Holdings (03386.HK), have declared their plans to either delist, spin off assets and list them on the mainland or sell a controlling stake to a mainland-listed company.

    In terms of the Hong Kong Depositary Receipt (HDR) market, its size has also decreased sharply in recent years. Depositary Receipt is a negotiable financial instrument issued by banks to represent foreign companies’ publicly traded securities. The original purpose of setting up the HDR market was to attract more foreign companies to Hong Kong. In 2014, Japan-based financial conglomerate SBI Holdings (06488.HK) delisted from the HDR market. On April 28, 2016, Brazil-based Vale Do Rio Doce (06210.HK), the world’s largest iron ore producer, also said it would delist from the HDR on July 28 this year. With the exit of the Brazilian company, there will be only two foreign companies on the HDR market, namely American luxury brand Coach (06388.HK) and the Japanese Fast Retailing Co. Ltd. (06288.HK).

    During the past 30 years, Hong Kong has been the most popular location for share listings of Chinese State-owned and foreign enterprises, once making it the world’s leading destination for initial public offerings (IPOs). Those companies had long been drawn to Hong Kong by its function as a global financial center, a stable legal regime and large numbers of institutional investors.

    However, once a hot spot, the Hong Kong bourse is now cold-shouldered by those public enterprises. Why has the situation changed so fast and what competition is the Hong Kong Stock Exchange facing?

    “Low valuation and low trading volume makes those companies want to be delisted from Hong Kong,” said Hong Hao, managing director and chief strategist at BOCOM International Holdings Co. With Vale Do Rio Doce as an example, its share price was HK$270 on Dec. 8, 2010, the first day of its listing in the Hong Kong Depositary Receipt market. However, the price plummeted to HK$40 recently.

    Besides poor share price performance, a price-to-earnings (P/E) ratio below 30 is another reason for the delisting trend. For example, price-to-earnings of Hong Kong-listed Wanda Properties is only 6. While mainland listed real estate developers Vanke and Greenland are 17 and 34 respectively. Low P/E ratios make Hong Kong less appealing to big mainland companies.

    Moreover, when mainland companies go public in Hong Kong, one of their purposes is to issue foreign bonds, get better credit ratings and access cheaper financing. But now bonds are getting more and more popular in the mainland market and it is very easy for those companies listed on the A-share market to issue bonds also.

    Despite the downward trend in recent years, the Hong Kong Stock Exchange is still one of the most profitable companies in the world. Its net profit in 2015 was HK$7.96 billion. With a total employee number of 1,568, its net profit per person last year was more than HK$5 million, which is much higher than net profit per person (HK$3.8 million) of American company Apple Inc. But if we carefully analyze the company’s annual report, we will realize that the Hong Kong bourse is crisis-ridden. Last year, total money raised from the bourse through IPOs was HK$263.1 billion. Of the total amount, HK$183 billion came from H-shares of mainland companies. If we further reduce the money contributed by those red-chip companies listed in Hong Kong (companies registered overseas with businesses from the Chinese mainland), the proportion of money earned from markets outside of China is really low.

    While facing competition from Shanghai, Shenzhen and other financial hubs, how will the Hong Kong Stock Exchange keep its edge for hosting big Chinese and foreign companies? This is a hard nut for the SAR government to crack.

    (The author is the editor-in-chief of the Shenzhen Daily with a Ph.D. from the Journalism and Communication School of Wuhan University.)