Matters:

On September 7, the HKEx published a consultation paper to seek market opinions on the proposed implementation of a SPAC listing mechanism in Hong Kong.

Guoxin Financial's view: Each exchange formulates SPAC rules, which is nothing more than weighing the pros and cons of three aspects, including investor protection, market quality, and market appeal. However, the Hong Kong Stock Exchange proposes to establish strict rules in all three areas: (1) only professional investors are allowed to subscribe and trade SPAC securities; (2) the initial financing threshold for SPAC is HK$1 billion; (3) only allow SPAC to be listed by experienced, reputable SPAC sponsors who are committed to finding high-quality mergers and acquisitions. Considering that the quality of listed companies that have gone to Hong Kong in recent years is generally very good, this trade-off of the Hong Kong Stock Exchange has to some extent maintained the trend of gradual improvement in its market quality.

We expect the early rules system of the Hong Kong Stock Exchange to be experimental. When the situation becomes clear, the Hong Kong Stock Exchange may gradually lower the threshold. After all, the high threshold in the three areas will be slightly repeated. For example, the Hong Kong Stock Exchange may gradually reduce investor qualifications for SPACs in the future, and not even set eligibility requirements, in line with the financial markets of countries such as the US, the UK, and Singapore, because the core value of SPAC is to directly face mass investors, allow more experienced and competent people to directly bypass the primary market, and return the “right to vote” in the capital market to mass investors. Otherwise, SPAC is just a listing channel, reducing its own social value.

(1) Regarding SPAC investor eligibility, there are no restrictions on mainstream stock exchanges in financial markets such as the US, UK, and Singapore, but the Hong Kong Stock Exchange suggests that only professional investors be allowed to subscribe and trade SPAC securities. In the Hong Kong region, the threshold for professional institutional investors is high, including (1) individuals with portfolios worth not less than HK$8 million, (2) trust corporations with assets worth not less than HK$40 million, and (3) corporations or partnerships with portfolios worth not less than HK$8 million or assets worth HK$40 million. However, considering that retail investors account for around 20% of the Hong Kong market (2019 data), such restrictions may mainly affect future southward wealth management customers to avoid blind investment behavior.

(2) Regarding market quality, the Hong Kong Stock Exchange suggests setting a high threshold for SPAC listing and SPAC M&A targets, setting a minimum capital raising threshold of HK$1 billion at the time of initial SPAC sale to ensure that SPAC has sufficient capital to find high-quality M&A targets. US exchanges do not stipulate the minimum amount of capital raised for an initial public offering of SPAC, but there is a minimum requirement for listing market capitalization. The NASDAQ global market segment is about HK$583 million (the capital market sector is about HK$388 million), and the New York Stock Exchange is about 776 million Hong Kong dollars (its US stock exchange is about HK$388 million).

(3) In response to market appeal, the Hong Kong Stock Exchange's bias on the above two points basically limits the Hong Kong Stock Exchange's appeal to SPAC sponsors and other participants. 1) Markets such as the US, the UK and Singapore do not require SPAC sponsors and directors to have any specific qualifications or licenses, and the Hong Kong Stock Exchange has certain requirements for this. The aim is for SPACs managed by better sponsors to be listed. It is recommended that sponsors have the following experience, (a) managing assets worth at least HK$8 billion on average for three consecutive financial years or more, or (b) holding senior executive positions with issuers of Hang Seng Index or equivalent flagship index constituent stocks. 2) Markets such as the US, the UK, and Singapore do not require independent investment by a third party, and the Hong Kong Stock Exchange suggests requiring SPAC to obtain capital from independent foreign PIPE investors to complete M&A transactions, and requires at least one independent PIPE investor to have total assets under management greater than HK$1 billion.

Investment advice: SPAC is an important long-term strategic foundation for the HKEx. Maintaining the “increase in holdings” rating starts from the perspective of exchange shareholders. For the Hong Kong Stock Exchange, the SPAC mechanism is not only a listing channel different from an IPO, but also a long-term strategic foundation for the Hong Kong Stock Exchange to bind market resources, including company executives and super investors in various industries. At the same time, the current industry landscape is gradually changing: (1) Under the theme of the era of common prosperity, mainland China has established the first corporate stock exchange, the Beijing Stock Exchange, which is bound to increase its appeal to high-quality small and medium-sized enterprises in the future, including Chinese securities, or indirectly affect the long-term growth of the Hong Kong Stock Exchange; (2) In the US, the NASDAQ Exchange and the New York Stock Exchange have already competed on SPAC rules, seeking to maximize the operating flexibility of all participants under the premise of legal compliance, and try their best to bind market resources to speed up the listing of high-quality companies. Therefore, currently the Hong Kong Stock Exchange, as an important exchange in China within the US dollar system, has sufficient motivation to use the SPAC mechanism to bind market resources to lock in the resource base for long-term growth.

Although stock market fluctuations have increased recently, from the perspective of value investment, the fundamentals of the Hong Kong Stock Exchange are very strong, the benefits continue, and the certainty of long-term growth is strong. Therefore, we maintain our “increase in holdings” rating and maintain profit forecasts. It is estimated that EPS from 2021 to 2023 will be around HK$11.26/13.78/16.50 respectively, maintaining a PE target multiple of 51 times, corresponding to HK$574.

Risk Warning: Regulatory Policy and Monetary Policy Risks