The news that a fledgling subsidiary of Hon Hai Precision Industry Co on Thursday last week received approval from China’s securities regulator to launch an initial public offering (IPO) on the Shanghai Stock Exchange has surprised many, with the approval coming just a little bit more than a month after the Internet-focused unit filed its listing application.
The debut of Shenzhen-based Foxconn Industrial Internet Co (FII), expected at the end of the month or early next month, according to reports in Chinese media, has raised concerns that other Taiwanese companies might also spin off units to quickly attract new funds through an IPO in China at a time when Beijing is attracting high-tech firms to list in the country and as China launches more incentives to attract Taiwanese companies.
The Financial Supervisory Commission (FSC) last week downplayed the ramifications of FII’s unusually speedy IPO approval by the China Securities Regulatory Commission (CSRC), saying that the swift approval is part of Beijing’s plans to attract technology and innovative companies in four areas — biochemistry, cloud computing, artificial intelligence and advanced manufacturing — while Chinese media have also reported that CSRC is loosening profitability and shareholder structure requirements on so-called “unicorns” — start-ups with a private valuation of more than US$1 billion — in the four industrial areas.
Whether or not the FII’s faster-than-expected IPO review is evidence of China’s intention to poach Taiwan’s top enterprises, the case has generated expectations that other Taiwanese businesses will float shares in China.
Indeed, having focused on the Taiwanese capital market for decades and listed more than 20 of its businesses on the local boards, the Hon Hai Group is stepping up efforts to raise capital abroad, after expanding its business into Japan, India and the US in the past few years. The group now has five units listed in Hong Kong and one in Japan, while Avary Holding (Shenzhen) Co Ltd, a flexible printed circuit board maker within the group, is waiting to go public after submitting its listing application to the Shenzhen Stock Exchange in November last year.
Hon Hai is not the only Taiwanese business that sees a need to raise capital on foreign stock exchanges. On Friday, Namchow Holding Co, which produces baking oil and frozen dough, obtained shareholder approval to seek an IPO for its subsidiary, Namchow Food Group (Shanghai) Co, on Shanghai’s main board. The unit plans to submit its listing application to the CSRC in the third quarter, its parent company said.
It is reasonable that local companies are considering listing their units abroad, especially in China, where shares benefit from higher price-to-earnings ratios, with stronger returns on new shares than in other markets.
However, such moves would pose a threat to local capital markets in terms of stock market return and trading volume: If local benchmark firms were to spin off their more promising units and seek overseas listings one after another, that might raise questions as to what there is left in the parent companies and might make investors consider whether to stick with the parent companies or move their funds overseas as well.
Apart from safeguarding the interests of domestic shareholders, another challenge for the nation’s financial regulators and stock exchanges is how to expand Taiwan’s capital markets and make them more vibrant by attracting a wider variety of companies to issue IPOs here. Local capital markets have succeeded in serving the needs of the computer and electronics sectors, and they are playing a key role in the development of the biotechnology sector, but looking ahead they must prepare to address the fundraising needs of innovation-focused start-ups in the fields of e-commerce, financial technology and artificial intelligence.
In the face of more capital market reforms in China, there is no time for Taiwan to sit idle.
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