A fintech IPO could be the biggest ever—and it picked China over the U.S. for its debut

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Chinese fintech giant Ant Group filed for initial public offerings in Hong Kong and Shanghai on Tuesday in what may become the largest IPO in history. The company will issue at least 10% in new shares in the IPO, which Bloomberg estimates will raise close to $30 billion.

In its Hong Kong Stock Exchange filing application, Ant disclosed profit margins of around 30% for the first six months of 2020 and revealed that Alipay, the mobile payment platform it runs, has an active annual user base of a whopping 1 billion.

The billionaire Jack Ma, best known for founding e-commerce giant Alibaba Group, also founded Ant, an affiliate of Alibaba. If Ant does in fact break the record for biggest IPO, it will join Alibaba in doing so. When Alibaba went public in 2014 on the New York Stock Exchange, the listing represented the biggest-ever at the time.

But the two Chinese tech giants diverge on an important point: listing venue.

In its listing document, Ant dropped a few clues as to why it chose Hong Kong and Shanghai over the U.S. It cited “geopolitical tensions, regulatory challenges and protectionist policies that may support domestic players” as risk factors in markets outside of China.

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Ant also acknowledged in the document concerns about “the relationship between China and the United States … which may result in or intensify potential conflicts in relation to territorial, regional security and trade disputes and negatively affect our cross-border business.”

An Ant representative declined to comment.

By shunning a U.S. listing and choosing Hong Kong and Shanghai for its debut, Ant joins a growing number of Chinese companies that are distancing themselves from U.S. exchanges.

U.S. regulatory scrutiny of Chinese firms is tightening, so “it’s logical for [Ant] to consider Hong Kong and a different market in China for the listing instead of the U.S.,” said Michael Wu, a senior equity analyst at Morningstar Investment Management in Hong Kong.

“As a preemptive measure to regulatory uncertainties, some Chinese companies—Ant in this case—are considering listing in Hong Kong and mainland China,” said Bruce Pang, head of macro and strategy research for China Renaissance Securities.

The regulatory uncertainties in the U.S. include the Holding Foreign Companies Accountable (HFCA) Act, which passed the U.S. Senate in May but still requires approval from the House of Representatives and President Donald Trump. The HFCA would give the U.S. Securities and Exchange Commission the power to delist foreign companies that don’t comply with U.S. auditing requirements. The act would target U.S.-listed Chinese firms especially since Chinese companies typically don’t comply with those requirements.

Listing closer to home—Ant is headquartered in Hangzhou, China—has its own perks. Recent reforms of the Hong Kong stock exchange and some mainland exchanges have made listing there “less complicated and less time-consuming,” Pang said, and have made those venues more appealing to Chinese technology companies like Ant.

Shanghai’s STAR Market launched last year with a Nasdaq-like focus on tech companies, and on July 22, the Shanghai Stock Exchange began to include STAR-listed companies in its calculations for the Shanghai Composite Index.

The Hong Kong Stock Exchange has also become friendlier to ‘new economy’ tech listings, including listing regime reforms in 2018 and the launch of the Hang Seng Tech Index in July, Pang said. The biggest companies on the tech index are mainland Chinese firms, and include Beijing-based Meituan Dianping, Shenzhen-based Tencent Holdings, and Hangzhou-based Alibaba, the Ant affiliate, which completed a secondary listing in Hong Kong in November.

Pang said that listing in Hong Kong and mainland China could help Chinese firms achieve higher valuations and better liquidity compared to a U.S. listing.

Chinese companies like Ant can count on domestic familiarity with their products to attract investor interest and raise capital onshore in Shanghai, Wu said. Investors in the U.S. and other foreign countries are able to freely buy shares in Hong Kong-listed Chinese companies, but foreign investors can only purchase shares in mainland-listed companies through strictly regulated trading programs that are limited to a small number of institutional investors.

For Chinese companies that want to appeal to international investors, “Hong Kong is still an attractive destination,” Wu added. “Given the current climate, it’s probably best to consider a Hong Kong listing instead [of a U.S. listing].”

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