News of a deal last month in which American auditors will be visiting Hong Kong to review the books of Chinese firms listed in the US seemed to signal the clouds are lifting over a row that has dragged on for years. But has the breakthrough come too late in the day to convince some of the Chinese companies affected by the row, even as the first team of auditors arrives in the city this week?
Certainly, the Chinese media expects more firms to follow in the footsteps of Tencent Music Entertainment (TME), which has pulled the trigger on its plan to go public in Hong Kong after being added to a “provisional list” of Chinese firms with audit issues earlier this year.
Uncertainty around the outcome of the row has contributed to a fall of more than a third in the company’s shares over the past year, with TME declining to a market capitalisation of about $7.8 billion this week.
On Wednesday, TME arrived at the Hong Kong bourse ‘by way of introduction’, meaning that no new shares had been issued and no new capital has been raised. TME is also insisting that New York keeps its role as its primary listing venue. But by making its US and Hong Kong stock fully fungible, it is giving investors the chance to trade securities held in one market in the other, providing “greater liquidity and flexibility amid an evolving regulatory environment,” it advised in the accompanying prospectus.
The switch to Hong Kong is more of a safeguard than a shake-up. Nor is there any indication that parent firm Tencent, which owns just under half of TME’s shares but controls about 90% of its voting rights, intends to sell down any of its stake. TME is an important contributor to the Tencent ecosystem, overlapping with much of its massive community of WeChat and QQ users. Music streaming through Kugou, Kuwo and QQ Music (its three main platforms) is closely integrated with many of the company’s other units, including its games and video businesses.
Advertising revenues from TME’s music streaming have slowed this year, constrained by new restrictions from the government on advertising formats and a downturn in the market because of a resurgence of Covid outbreaks. Analysts say there is scope for the company to grow faster in areas where it has been expanding its product offering, such as demand for long-form audio services like audio books and podcasts. Another bright spot is live music performances, where TME expects improved margins from its advertising and sponsorship deals. But over the medium term it needs to convert more of its non-paying customers (well over 500 million) into paying subscribers. Spotify, the largest music-streaming platform outside China, has a paid subscriber ratio that is more than three times higher than TME’s.
TME’s listing by introduction brings a bit of media focus back to Hong Kong’s capital markets, where funds raised through IPOs plunged more than 90% in the first half of this year to just $2.3 billion, the lowest level since the first half of 2003. Part of that is because firms have been reluctant to issue new shares at a time of depressed valuations. Hong Kong is still subject to Covid controls, of course, including quarantine periods for international arrivals, which has knocked some of the stuffing out of capital markets activity too.
What exchange bosses really want are fundraisings of larger scale, especially primary listings. One candidate is Leapmotor, a Zhejiang-based electric vehicle brand, which will bring some momentum before the end of this month by raising at least $1 billion in new capital, according to the local press. Hong Kong Exchanges and Clearing, the operator of the city’s exchange, is also said to be working on plans to make it easier for tech firms to sell shares, by reducing the revenue requirements for listing candidates to as low as HK$200 million ($25 million) from the current threshold of HK$500 million.
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