Stock Connect Set to Expand to Dual-Class Shares

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Mainland-based investors will soon be able to invest in Hong Kong-listed dual-class shares such as those of smartphone maker Xiaomi and e-commerce company Meituan Dianping through the Stock Connect program, one year after the Hong Kong Stock Exchange allowed this class of shares.

Hong Kong Exchanges and Clearing and the China Securities Regulatory Commission have reached an agreement to allow companies listed with a weighted voting rights structure to be included in Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect starting in July. Hong Kong’s Secretary for Financial Services and the Treasury, James Henry Lau, confirmed details this week after a visit to the Shanghai stock exchange.

“After long discussions between the Hong Kong exchange and the China Securities Regulatory Commission, we agreed that, in July, weighted-voting rights shares will be included (in the stock connects between the mainland and Hong Kong)”, said Lau.

Regulators from Shanghai, Shenzhen and Hong Kong agreed on the arrangement back in December. Lau’s comment confirmed the new rules would be officially implemented in July this year.

Shake up

The agreement came one year after Hong Kong announced the biggest shake-up of listing rules in decades in April 2018 to allow technology firms with weighted voting rights structures to list in the city.

The structure, sometimes also known as the dual-class share structure, enables founders of tech firms to maintain control of the company’s strategy even after they are listed. In the past, it was said that Chinese technology firms preferred to list in the U.S. over Hong Kong because the city did not allow firms with weighted voting rights structures to list.

Back in 2014, the HKEX rejected Alibaba’s application for an IPO because the company wanted to keep its dual-class share structure after going public. The technology giant eventually launched its IPO in New York. The offering is still the world’s biggest IPO to this date having raised a record US$25 billion.

China decided against letting such shares be part of the connect scheme back in April 2018, an often-cited reason as to why new listings have underperformed.

Smartphone maker Xiaomi currently trades at HK$11.98, a 30 percent fall from the offer price of HK$17. Meanwhile, food delivery-to-ticketing platform Meituan Dianping has fallen about 25 percent from its issuing price of HK$74 to HK$56.25.

Analysts believe that allowing Chinese investors to buy shares of companies with dual-class structures would be welcome news for big-name companies like Xiaomi.

“There would be a lot of demand from the Southbound channel. Xiaomi is very well known in China,” said Stanley Chan, director of Emperor Securities Limited.  

Xiaomi’s shares jumped more than 4 percent on Monday following Lau’s comments. Deutsche Bank upgraded the target price of the company slightly to HK$16.5.

“Xiaomi won back market confidence when Hang Seng Indexes Co Ltd announced it will include Xiaomi in the Hang Seng Composite Index (in 2018),” said Castor Pang Waisun, head of research at Core Pacific-Yamaichi International. “And today’s fresh drive from the city’s (Hong Kong’s) stock exchange embodies investment demand from both sides”.

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