After the SPAC mechanism landed, the Hong Kong Stock Exchange welcomed the first "crab eater", CMB International and other initiated the establishment, will the market buy it?

Reporter 丨Liu Chenguang

With the official landing of the Hong Kong Special Purpose Acquisition Company (SPAC Listing Mechanism), Hong Kong stocks may usher in the first SPAC company.

On 17 January, Aquila Acquisition Corporation (AAC) filed a listing application with the Hong Kong Stock Exchange.

The so-called SPAC refers to the establishment of a shell company to raise funds, and then through the acquisition of the target company to help the target company to achieve listing.

Overall, SPAC is shorter than traditional IPOs. Shen Meng, executive director of Chanson Capital, pointed out that the process of SPAC is that the sponsor first builds a shell, then raises investors, forms a cash-only "shell", and then promotes this "shell", that is, SPAC to go public first. Because it's all cash, listing review is relatively easy. "After the listing, this SPAC must find the target business within the specified time, and then use the money and/or new shares in its shell as a means of payment to merge with the target business." Because this merger is similar to a backdoor listing, it does not need to go through the process of subscription, roadshow, and prospectus like an IPO, so it can be completed in a short period of time. ”

The listing application shows that AAC is a newly incorporated Cayman Islands exempted company acquiring a company for a special purpose for the purpose of one or more companies. The Company plans to focus on technology-enabled companies in asia(particularly China) in new economy sectors such as green energy, life sciences and advanced technology and manufacturing, although the company may be looking for special purpose acquisition targets in any industry.

The company's sponsors are CMB International Asset Management Limited (CMB International Asset Management) and AAC Mgmt Holding Ltd (AAC Mgmt Holding). According to the listing application, CMB Asset Management and AAC Mgmt Holding hold 90% and 10% of the issued shares of CMBI AM Acquisition Holding LLC respectively, while CMBI AM Acquisition Holding LLC holds all of the issued Class B shares. Class B shares will not exceed 20% of the total number of issued shares on the listing date.

According to the prospectus application materials, CMB International is a wholly-owned asset management company and a wholly-owned subsidiary of China Merchants Bank. As of 31 December 2021, CMB International Asset Management and CMB International Shenzhen had a combined asset management scale of over US$30 billion (of which CMB International Asset Management alone had more than HK$25 billion in assets under management), achieving a return on investment of about 2.9 times from 2015 to 2020.

In terms of licensing, CMB International Asset Management is licensed by the SFC to carry out Type 1 (securities trading), Type 4 (advising on securities) and Type 9 (providing asset management) regulated activities.

The Company has also published criteria for acquisitions of industries that are leading the new economy sector with favorable long-term growth prospects, differentiated value propositions and technical barriers, a retrospective financial track record, ethical, professional and responsible management, and strong environmental, social and governance values.

In fact, SPAC generally has a time frame for mergers and acquisitions. AAC also noted in its risk warning that the Company may not be able to find a suitable SPV M&A target and announce the SPV M&A transaction within 24 months of the listing date. Even if a suitable SPV M&A target can be found, it may not be possible to complete the SPV M&A transaction within 36 months of the listing date. The ability to complete M&A transactions with special purpose acquisitions may be adversely affected by overall market conditions, volatility in equity and debt markets, and other factors described in this document.

Pang Min, an economist at Huaxing Securities, pointed out that the SPAC listing mechanism of the Hong Kong Stock Exchange better balances the requirements for expanding new business and protecting the interests of investors. Compared with SGX, HKEx's consultation paper sets better standards for promoter qualifications and subscription ratios, investor qualifications, fundraising scale requirements, voting requirements for transaction approval, etc., and is more flexible in terms of announcing transaction plans and completing transactions.

In general, Pang Min believes that the SPAC listing mechanism and market expectations finalized by the HONG Kong Stock Exchange and the industry practice practice are relatively consistent, which is expected to form effective competition with other major exchanges and attract more companies from Southeast Asia and Greater China to list in Hong Kong. Compared with Singapore, the introduction of the SPAC listing system in Hong Kong, China, is more worthy of expectation, and the Hong Kong Stock Exchange has become an important destination for Chinese enterprises to list overseas, and in terms of supervision, the communication between the regulators in Hong Kong and the mainland is also smoother.

Pang pointed out that the SPAC mechanism is not in line with the consistent regulatory culture in East Asia. "From the perspective of enterprises, the pursuit of SPAC by Chinese companies to go public is also inconsistent with the direction of regulatory requirements to improve the quality of enterprises and the transparency of IPOs. In addition, Chinese companies and investment banks are more familiar with traditional IPOs, and the demand for SPAC is not very strong in the context of the full implementation of the registration system. ”

A senior Hong Kong capital market investment manager admitted that it also depends on the follow-up reaction, and what assets can be loaded, there is no response in the market for the time being, the value of De-spac before is cash, and the probability of success mainly depends on the support of CMB International. The person pointed out that if the successful listing raises funds, it is put into a custody account, and only a single project can be acquired, so before it successfully acquires a single project, in fact, the value of the entire company is the total amount of cash on the book, mainly to see whether the company can successfully acquire some assets in the end, and then what impact that asset will have on the stock price of the company that has been listed.

Huang Lichong, president of Huisheng International Capital Co., Ltd., told Interface News that for larger enterprises, the threshold of the US listing rules is low, but the financing difficulty is high, so the MAIN SOLUTION OF THE US SPAC IS THE RISK OF FAILURE TO ACHIEVE FINANCING AND THE FAILURE TO GO PUBLIC. Due to the low financing difficulties of large enterprises and the high requirements of the listing rules in Hong Kong, SPAC is mainly used to reduce the risk of losing listing costs due to unsuccessful listing applications.

He believes that Hong Kong's SPAC mainly provides a fast listing path with low risk of listing application for companies with big capital support, institutional investor support, overall no shortage of money, and can meet the listing requirements. SPAC provides institutional investors with an investment model that can quickly leverage the Hong Kong stock market to cash out. SPAC in Hong Kong has actually become a more certain appointment exit model after PE investment.

Huang Lichong pointed out that assuming the approval of the Stock Exchange, the injection of assets still needs to meet the requirements of the IPO. Therefore, if the assets to be injected cannot meet the requirements of the new listing, there is still no way to exit. He believes that this is more to give institutions to invest in an investment profitable business model, which has no special benefits for the companies to be listed except for being more certain, and the dilution is more severe. In general, the injection valuation of the SPAC proposed listed company will be lower than that of the IPO listing, and this part of the dilution has been taken away by the promoter of the listing in the form of cost shares and warrants.

Huang Lichong believes that SPAC is beneficial to groups in four aspects. Investors who have already invested in the form of PE with the intention of cashing out; state-owned enterprises of a certain size; a relatively fast model for certain Chinese-listed companies; and a listing schedule for the proposed listed companies that are not short of money and have capital support, reducing the risk of wasting listing fees if their applications are not successful.

A veteran familiar with overseas capital markets said that the SPAC of the Hong Kong stock market is to keep up with the trend of the development of the US stock market, to prevent US stocks and new stocks from competing for listing resources, and the future listing resources of Hong Kong stocks will be largely based on the mainland, and it will be difficult to win more listed companies outside the launch of SPAC.

It is worth mentioning that in terms of protecting the rights and interests of investors, the SPAC rules of the Hong Kong Stock Exchange have great advantages over other major exchanges, which can be described as the strictest in history. "Unlike SPAC listing mechanisms in other markets, the SPAC mechanism we recommend introducing is designed to design a regulatory framework that helps control risk at every step of the complex SPAC architecture while maintaining the commercial attractiveness of the SPAC-wide mechanism." HKEX Listing Director Chan Yi Ting has said.