Case study - Comparative study of location for IPO between the US and China

A very complete comparison of IPO possibilities for Chinese companies: Hong Kong, the U.S., Singapore, mainland A shares, new three board ...

IPO refers to the non-listed companies after public sale of its shares to the public investors through the securities regulatory agencies. IPO, including domestic IPO and overseas IPO. Overseas IPO mainly concentrated in Hong Kong, Singapore and the United States of New York Stock Exchange and Nasdaq Stock Exchange.

1 - Domestic IPO

In order to withdraw for the first time in Chinese domestic market, there are main board market, small and medium-sized board market and Growth Enterprise Market (GEM) and each market on the company's listing conditions, have different provisions in the company's total share capital, profitability and financial conditions. The main board market is very strict, and small board market and the GEM market requirements are less important. Most of the domestic investors invest in small and medium enterprises. It will be much more difficult for these small and medium enterprises to reach the main board market conditions, so now investors are mainly concentrated in the small plates and the GEM.

A - The advantages of the IPO exit

① Investors can get a higher income. The initial public offering of return rate is the highest, which is why the initial public offering becomes the preferred way to withdraw for investors.

② Investors and companies can win credibility and improve visibility, but also help enterprises to broaden the financing channels to get more financial support. The listed companies have high expectations and need to do a lot of preparation a year or two in advance. The corresponding performance and capital requirements and other indicators have to meet the listing standards. Companies will share some information about the preparatory process to the market, which also plays for the enterprise's advertising. Then investors can sell the stock at satisfactory prices, and the securities market would provide continuous financial support for the future development.

B - Disadvantages of IPO exit

① Enterprises and investors will face greater uncertainty. National Corporate Law, the Shanghai Stock Exchange and the Shenzhen Stock Exchange have a one year lock-in period for stock transactions. Capital market situation recently changed, due to international capital market and domestic macroeconomic policy and other factors, investors bear some risk this year after the lock-up period.

② High cost. In the process of applying for listing, the procedures are more cumbersome. Accounting firms, law firms, securities companies, these intermediaries are costly and slow.

③ Supervision becomes more and more strict; therefore, it becomes more difficult to exit through the IPO.

C - Companies suitable for local IPO exit business

Based on the above conditions in China, and on the advantages and disadvantages of the market, generally only large enterprises are suitable to be listed in China. Or those companies that are not eager to seek development funds and willing to accept a long audit process. As there is a main board and a small and medium-sized board, if investors can wait for the small and medium enterprises queuing audit, then listing in the domestic market is a good choice.

2 - US securities market IPO

The United States has today's largest and most mature capital market. New York gathered the vast majority of the world's hot money and venture funds, the total market value of the stock accounts for almost half of the world's, the quarterly turnover accounts for more than 60% of the global turnover. When the company's net assets reaches 50 million RMB, or a annual turnover of 200 million RMB, and the net profit is more than 15 million RMB, then it can consider issuing IPO in the Nasdaq market, and even better companies can go to New York Securities Exchange IPO.

For China's small and medium companies, the most appropriate way to market in the United States is to use reverse merger. The reverse merger takes much less time and is cheaper than the IPO listing. 2013 data show that the initial cost of the IPO is generally $100-150 million a year, and the pre-listing of reverse merger is generally about $ 45-75 million in the span of 4-6 months.

A - Advantages of US Listing

① Multi-level diversification of the US securities market to meet the financing requirements for different enterprises. In Over-The-Counter Bulletin Board (OTCBB) counter listing transactions on the business without any requirements and restrictions, only three brokers are willing to do this stock market, companies can first buy in OTCBB reverse merger trading in order to raise the first funds, such as to meet the Nasdaq's listing conditions, then it can apply to upgrade to the Nasdaq listed.

② None of the world's financial markets can match the size of the US securities market. Companies gain funds faster but also allow investors to withdraw faster.

③ The US stock market’s high turnover, price-earnings ratio, hot money and venture capital, as well as investors advocating adventure investment awareness and other distinctive features, attracts more Chinese enterprises.

B - Disadvantages of US Listing

① The geographical, cultural and legal differences between China and the United States result in many obstacles. Many Chinese companies do not consider the reasons for listing in the United States due to the geographical, cultural, language and legal aspects of the huge differences in the process of listing enterprises. Therefore, Wall Street seems a bit far away and unfamiliar for Chinese companies.

② There' a limited awareness of Chinese enterprises in the US. Unless it is a large or well-known company, it’s more difficult for Chinese enterprises to get recognition in the US capital market, compared to Hong Kong, China or Singapore. However, the US securities market has become more and more clear about the “Chinese Concept”, this situation has been improved in recent years.

③ Relatively high listing costs. If you choose to IPO in the United States, the cost may be relatively high (about 1000-2000 million RMB, or even higher, similar price in Hong Hong), but if you choose to buy the reverse merger, the cost will be reduced a lot.

C - Suitable for companies to be listed in the United States

Whether it is a large Chinese enterprises, or small and medium private enterprises, the US market should be suitable for them due to multi-level capital market characteristics and the diversity of listed companies for different enterprises; therefore, all levels of business are suitable to be listed in the United States.

3. Singapore Stock Market IPO

Singapore Exchange (Singapore Exchange) (hereinafter referred to as "SGX") can be traced back to the Singapore Brokers Association in 1930. SGX has adopted the international disclosure standards and corporate governance policies to provide a well-managed investment environment for local and overseas investors. After several decades of development, the Singapore securities market has become Asia's major securities market. Singapore's political and economical infrastructure is stable, and the regulatory environment is pro-business, as an internationally renowned fund management center. The total management of funds in Singapore has more than 26% annual growth rate since 1992.

At the end of 2001, it reached 300 billion. 800 international fund managers and analysts' networks also provide an attractive group of investors with a broad range of shareholder, especially in volatile market conditions where these long-term investors will provide more stable corporate finance growth environment. Singapore securities market has become recognized as the leading stock market in the Asia-Pacific region. In addition, foreign companies accounted for 40% of the total market capitalization of listed companies in the SGX, making the SGX become one of Asia's most international exchanges and one of the preferred listing country in Asia Pacific.

A - Advantages of listing in Singapore

① Application for listing in Singapore is relatively short and the rate of success is also higher than the domestic market. The domestic board market often takes 2 to 3 years. On the contrary, Chinese companies listing process is relatively simple and shorter in Singapore in line with the conditions of the proposed companies are generally able to achieve a listed transaction within 1 year. Singapore is a great platform for Chinese enterprises to grasp the international securities market opportunities in a relatively short period of time. In addition, the shortening of the listing time is also conducive to the listed companies to control the cost of overseas listing.

② Flexible financing and low difficulty level. At present, the domestic listed companies' refinancing costs are relatively high. According to the statistics, the current issuance examination committee of the domestic listed companies refinancing application approval rate is only 50%. While the foreign securities market refinancing is relatively flexible, it may be issued at any time. Currently, a considerable number of Chinese companies in the Singapore securities market has greatly exceeded the initial public offering of enterprises in order to obtain financing.

③ Tax incentives. Singapore's tax and foreign exchange system is not inferior to the Bermuda and the British Virgin Islands (BVI), so the joint-stock company can be located directly in Singapore, which reduces the listing link and saves listing costs. Such as Singapore's tax policy provides "no profit, no tax, no audit report." Singapore government and Chinese government signed a double taxation agreement, investment protection agreement, and free trade agreements, with the support of the policy greatly reduced the cost of corporate expenses.

B - The limitations of Singapore's listing

The weakness of the Singapore securities market is also evident, compared to the United States, the size of the Singapore securities market is much smaller, companies listed in Singapore may only have limited funds. In addition, the Singapore market price-earnings ratio, turnover and other important indicators are lower than the United States, which also greatly reduces Singapore's competitiveness.

C - Suitable enterprises to be listed in Singapore

The enterprise should be some small and medium private enterprises, which generally do not want to wait for the audit and do not want to pay too high listing costs.

4 - Hong Kong Stock Market IPO

Hong Kong is the first place for Chinese companies to list overseas and is the most concentrated place for Chinese companies to list overseas. This is due to the unique geographical location, financial position of Hong Kong, and the special relationship with Mainland China.

A - Advantages of listing in Hong Kong, China

① Hong Kong's excellent location. Hong Kong and mainland China border lies in Shenzhen, the two only separated by a line, and Hong Kong is the closest oversea market to China.

② Hong Kong and mainland China hava a special relationship. Although Hong Kong returned to China in 1997, Hong Kong people were not very different from the Chinese residents in terms of living habits and social etiquette. With the popularity of Putonghua in Hong Kong, the language barriers of Hong Kong people and mainland residents have also been eliminated. Therefore, from the psychological complex, Hong Kong is the most suitable to accept mainland enterprises.

③ Hong Kong's financial position in Asia and the world is also an important chip to attract mainland enterprises to market in their capital markets. Although China's Hong Kong economy continues to slump after the 1998 economic crisis, its financial industry has played an important role in Asia and the world. China's securities market in Hong Kong is one of the top ten markets in the world, only second after to Japan (the comparison here is based on two markets in China and Shenzhen).

④ Diversification of ways to achieve listing and financing in Hong Kong. In addition to the traditional initial public offering (IPO), companies can also obtain reverse acquisition of listed funds.

B - Limitations of listing in Hong Kong

① Capital scale. Compared with the United States, Hong Kong's securities market is much smaller. Its stock market capitalization is only about 1/30 of the United States New York Stock Exchange or ¼ of Nasdaq. The stock turnover is far lower than New York Stock Exchange and Nasdaq.

② Price-earnings ratio. Hong Kong stock market price is very low, probably only 13. In New York Stock Exchange, the price-earnings ratio can generally reach more than 30, and NASDAQ also has more than 20. This means that, when other circumstances stay the same, funds are generally smaller in Hong Kong compared to the United States.

③ Stock turnover rate. Compare to NASDAQ 300% of the turnover rate and New York's 70% turnover rate, Hong Kong stock market turnover is also very low, only about 55%. This shows it would be more and more difficult to withdraw stocks after it’s being listed in Hong Kong.

C - Suitable enterprises to be listed in Hong Kong, China

For some large state-owned or private enterprises, to avoid waiting for a long time in the queue of the audit process, Hong Kong's IPO is a good choice. For small and medium private companies, although you can choose Hong Kong GEM or reverse merger listing, the funds will be very limited. Therefore the United States’s market would be more favorable for small and medium private enterprises.

To sum up, IPO approach is a high-yield channel for capital withdrawal, and can bring a better reputation to investors. But regarding the requirements of the listing conditions and the need to spend a higher cost of listing, IPO exit from the investment projects also seems more difficult. Through the comparison of the four capital markets in China, the United States, Singapore, Hong Kong and China, the basic profile and basic requirements of the listing are generally demonstrated. Through these comparisons, it is not difficult to see that the three capital markets have their own advantages and disadvantages: China's domestic listing costs are relatively low, but require a long waiting time for to review; although the United States has the relatively higher cost, it has diverse US securities market; Hong Kong's advantage is mainly the geographical and language proximity, but Hong Kong’s capital size is relatively small compared to the United States.

The new three board listing to achieve exit

The so-called new three board listing, is a channel for the investment institutions to withdraw. On January 16, 2013, the national small and medium-sized enterprise share transfer system (commonly known as the "new three board") was held in Beijing, and a large number of investment institutions were to withdraw from the new three board channel. The new three board listing provides enterprise official transaction channels.

The new three-board market mainly includes the transfer of the secondary market (including agreement, market transaction), transfer board (policy floor uncertainty), and acquisition.

1 - Advantages of new three board listing

A - Faster listing

As long as the sponsors are recommended and supervised, the new three board general listing cycle is only 6 months, while the domestic IPO needs 2 years or even longer.

B - Good enterprise value and stock liquidity

Non-new three board companies have generally 15 times the following. The new three board companies’ acquisition price is significantly higher than non-hanging board company in the same industry. Market makers for the company's overall valuation of the promotion is more obvious. On the one hand, the market screening is very strict, because of the brokerage reputation guarantee. On the other hand, the market provides a new three board of the scarcity of liquidity: anyone can buy and sell at any given time.

C - Speed up the transfer process

Now we can test the level of intermediary services to see the degree of market awareness of the company through the new three board. Compared to non-listed companies, new three board listed companies’ intensity of audit will certainly be different, especially after the audit is assigned to exchange.

D - Government financial support and low cost of listing

In order to encourage local enterprises to join the capital market, accelerate the development of local economy, local governments have a relatively good financial support in the enterprise listed capital market. Host brokers, accountants and other expenses in the listing are also extremely low.

2 - Advantages of new three board listing

A - Poor liquidity: the market performance deserted

When the market set a threshold for investment, the new three board second-class market funds become much smaller than the main board. As the number of listed companies are increasing, there are less capital for each enterprise, which can bring a series of chain reaction. The first is ambiguous positioning, compared with the pure secondary market, the liquidity is greatly reduced; compared with pure PE / VC, the valuation is much higher, the investment cost is too high which makes external funds difficult to enter. Because government policy is not up to expectation and the market position becomes confusing, the new three board exit channel doesn't easily meet the needs of investors and businesses.

B - Transfer board channel

In 2015, the transfer board was once considered the first choice for the new three-board exit mechanism because in China, despite that the fact entering the main board means a new era for enterprises, the vast majority of companies are excluded from the option due to strict investigation and high threshold. If the new three-board is to a certain degree a kind of green channel, it will become the coveted dividend of many enterprises. On the one hand, the current A shares has at least 600 companies in the queue to review 200 listed companies in average per year, which is a long process; so the new three board direct transfer plate is an unlikely option. On the other hand, the share transfer system has repeatedly said the new board is not a subsidiary of the main board market. The quality of business incubation is not conducive to the new three board independent development path, so the new three board transfer system basically became hopeless.

C - The acquisition as the policy limits pricing, the acquisition becomes difficult to achieve revenues

As China's main board market has a price-earnings ratio of 23, that is, new stock price-earnings ratio that is higher than 23 has less chance to pass the review. While the issue of shares to buy assets is rarely more than 20 times the price-earnings ratio to buy in reality, for the new three board currently, the average price-earnings ratio is of 30-40, which caused the main board company to buy a little better new board business. Then we face a substantial discount issue: whether the new three board companies can tolerate an ultra-low price was acquired. The may require enormous limit up in order to make up the cost. Of course, due to the huge capacity of the new three board, some great companies will be underestimated, which could be one of the logic of investment for the new three board.

D - IPO: resistance and difficulty

Compare to new three board companies, independent IPO cost more. The current board review will continue to be strict. On the other hand, the next one or two years is the innovation layer system dividend window period for enterprises to enter the innovation level. By selecting an independent IPO, enterprise will not only miss the time, but also waste a lot money while waiting for the trial process.

3 - Suitable enterprise to be listed on the new three board

The new three board as part of the national multi-level capital market, whether it is policy or the market is still improving. The new three board, unlike the main board market, has a fair price every one can agree on. But if the investor wants to withdraw as soon as possible, the new board can seek for mergers and acquisitions for enterprises and provide a lot of guidance. For enterprise having temporary difficulties to enter IPO immediately, new three board could also be an ideal option.

Original document

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