"Hong Kong Blind Box" has been listed one after another, and institutions say that SPAC still has development potential in Asia

Economic Observer Network reporter Monday Sail with the acquisition of Huide (7841. HK) is listed on the Main Board of the Hong Kong Stock Exchange, and there are currently three Special Purpose Acquisition Companies (SPAC) listed in Hong Kong.

In this regard, Zhou Lin, executive director of Huasheng Vision Enterprise Services, told the Economic Observer Network reporter: "In the past two years, the number of SPAC projects listed in the United States has reached nearly 50, most of which are registered in Hong Kong and Chinese mainland, which is the main body that the Hong Kong Stock Exchange hopes to win, and it is also in line with the service audience and service advantages of Chinese securities companies, so the Hong Kong stock SPAC mechanism can indeed bring major development opportunities for Chinese securities companies." ”

In Zhou Lin's view, although global inflation continues to soar, prompting the Fed to raise interest rates, many investors have withdrawn their funds from SPAC transactions and moved to other places, while regulators' scrutiny of the SPAC market is also strengthening, which makes SPAC transactions less attractive to participants. However, SPAC still has the potential to develop in Asia, and Hong Kong, as a leading international financial centre, has both depth and breadth of capital markets, and gathers many institutional investors and professionals, coupled with a world-class regulatory system, which is enough to provide a favorable environment for the development of SPAC.

"Hong Kong Blind Box" has been listed one after another

On 15 August, SPAC (Special Purpose Acquisition Company), hong Kong Huide Acquisition (7841.HK), which is promoted by former President of the Hong Kong Monetary Authority, and Tsang King-Xuan, former Chairman of Standard Chartered Bank Greater China, was listed on the Main Board of the Hong Kong Stock Exchange, becoming the third special purpose acquisition company to be listed in Hong Kong.

According to public information, the Huide acquisition was submitted in February 2022, with Haitong International as the sole sponsor, and a total of 100 million shares were issued at an issue price of HK$10.00 per share. In terms of the use of funds, the total proceeds of the Company will be deposited into a closed escrow account located in Hong Kong, which will be held by BOCI Best Trust Limited as the custodian of the escrow account.

SPAC is a shell company whose IPO purpose is to successfully find a suitable target company and complete the merger within a preset period of time after listing (36 months stipulated by the Hong Kong Stock Exchange), and the merged successor company will become an ordinary listed company, and the life cycle of SPAC will also end at the same time (the process from finding the target company to the successor company becoming an ordinary listed company through merger is called the De-SPAC stage). Conversely, if the merger cannot be completed within the specified time, hkex will delist it, and SPAC will need to liquidate and return the full proceeds of the raised funds plus accrued interest to the shareholders on a pro rata basis.

In fact, with the support of the daily liquidity of global central banks in the past few years, the number of global SPAC listings has ushered in a spurt. Since the launch of the Hong Kong version of the SPAC mechanism this year, the market has also shown strong interest in the new listing path. Wind data shows that as of August 25, 13 companies have submitted SPAC listings to the Stock Exchange, of which 4 are currently unproven, 6 are in the process of being processed, and 3 have passed hearings, of which 3 have been successfully listed.

Zhao Hongmei, an analyst at Zhongtai International Research Department, pointed out in the research report that 6 of the 13 SPAC companies that have submitted listing applications to the Hong Kong Stock Exchange have shown their emphasis on the biotechnology field in the choice of industry, in addition, new consumption, new energy, advanced manufacturing and other industries with technology empowerment as business models and high barriers to entry are also the focus. For the target enterprises, the success rate of SPAC listing is high, the time is short, and it can also avoid the various "uncertainties" of traditional IPOs, and the amount of financing is determined, and it is expected that a number of fast-growing enterprises, including biotechnology, can increase their market value through new channels.

Speaking of the listing of SPAC, Zhou Lin, executive director of Huasheng Vision Enterprise Services, told the Economic Observer Network reporter, "SPAC has appeared in the United States as early as the 1990s, compared with traditional IPOs, SPAC can provide a faster way to enter the open market, especially convenient for startups, more time-saving, but also more cost-effective." ”

Zhao Hongmei pointed out that the performance of the Hong Kong new stock market in the first half of this year was dismal, and the number of new stock listings plummeted by 90%, setting a new low in recent years, but shortly after the Hong Kong Stock Exchange launched the SPAC (Special Purpose Acquisition Company) mechanism in January, there were already new SPAC companies that had been successfully listed in the IPO market, becoming a rare bright spot in the dismal new stock market. Although the US has seen a decline in the volume of SPAC M&A transactions and a cooling of investor sentiment, Hong Kong's testing of the waters is still proceeding in an orderly manner and has learned from the US lessons, focusing more on quality than quantity.

Zhou Lin believes that "as the application of SPAC has become more widespread, many well-known investors and hedge fund managers have entered this field, and some high-profile SPAC mergers and acquisitions have also established a reputation for this investment tool." Most of these senior promoters continue to participate in the operation of the target company after the merger is completed to continue to support. The manager's extensive experience and outstanding track record, as well as the improved correlation between promoter incentives and investor returns, have increased investor confidence in SPAC and helped raise significant capital to acquire larger, more mature companies. In addition, many investors have helped the SPAC market by seeking to obtain their own desirable returns in a volatile market environment by seeking to list SPAC. ”

Considering the post-listing mechanism of SPAC, some insiders directly call it "the 'blind box' of the capital market". Because of this, the promoter of SPAC has become an important factor in investors' investment decisions under the premise that the identity of the merged company is not known and other relevant information is difficult to obtain in advance.

An inquiry into public information shows that the current 13 SPAC promoters of the Stock Exchange are mainly investment institution giants and senior investors, including private equity funds, well-known public figures, NASDAQ and listed companies on the Stock Exchange, asset management companies and investment banks. Notable personalities who participated in the first round of the Hong Kong SPAC include Former HKMA President Tan Tak Lin, former Standard Chartered Bank Greater China Chairman Tsang Jing Xuan, former Alibaba CEO Wei Zhe, well-known public figure and brand founder Li Ning, etc. Institutional promoters with Chinese backgrounds include the Hong Kong platform of Chinese-funded financial institutions such as CMB International and ABC International Asset Management. At the same time, most of the first Hong Kong S PACs focused on hot areas such as new consumption and new energy in the Asia-Pacific region or Chinese mainland.

In this regard, Zhou Lin told reporters that the role of the promoter is similar to that of the partners in venture capital, and its qualifications, reputation and quality have a crucial impact on the development and performance of SPAC projects. A study by HKU's School of Economics and Management shows that the strength and reach of promoters in the private equity (PE) and venture capital (VC) industries are important indicators of their capabilities. Promoters with high network centripetality typically also have more successful IPO funding, better acquisition targets and better long-term equity returns, as well as more desirable post-merger operating performance of the target company.

The best investment window or before M&A

"The professionalism of the sponsor and the richness of its own resources are the keys to SPAC's success, which determines the quality of assets and the speed of project progress; The performance of SPAC listing is related to the post-listing environment, and whether there is a high premium rate has a greater relationship with the current industry heat and company fundamentals. Futu investment research team members told reporters.

Judging from the three SPAC companies that have completed their listing on Hong Kong stocks this year, as of the close of trading on August 24, the share price of Huide Acquisition was quoted at HK$9.95 per share. The shares of AQUILA ACQ-Z (7836.HK) and VISION DEAL-Z (7827.HK), which previously landed on the Hong Kong Stock Exchange in March and June respectively, also performed more generally, with HK$9.10/share and HK$9.85/share respectively as of the close of trading on August 24, both below the issue price of HK$10/share.

In this regard, some market participants believe that the Hong Kong SPAC market only professional investors to buy, and each lot must be more than 1 million Hong Kong dollars, and requireSPAC merger and acquisition transactions before the completion of the SPAC shares and warrants are not allowed to buy and sell separately, so the overall trading volume is very low, SPAC landing in the early stage of the general stock price fluctuations.

For the light trading of the listed SPAC, Zhou Lin believes that this is related to the mechanism characteristics of the SPAC itself: "SPAC is easy to trigger conflicts of interest between promoters and shareholders, that is, to sacrifice the quality of mergers and acquisitions in order to achieve the economic inducement of the transaction." At the same time, the valuation of SPAC depends on whether it can find the target merger and acquisition company, and if it encounters competitors after locking, can it win the target favor with high prices and attractive conditions? After the merger is successful, can its investment management create a win-win situation with the pragmatic management of the acquired enterprise? Subject to these unknowns, SPAC's pre-merger performance is often far inferior to that of traditional IPOs. ”

However, from the perspective of investment, Zhao Hongmei said in the research report that SPAC has a more flexible trading strategy than traditional IPOs, and SPAC IPO, looking for M&A targets, De-SPAC and other points in time can enter. In order to avoid the sharp stock price fluctuations after the merger and the dilution effect of the promoter's shares, "we believe that the best investment window for SPAC after the IPO, before the merger with the target company" is considered.

In Zhou Lin's view, although global inflation continues to soar, prompting the Fed to raise interest rates, many investors have withdrawn their funds from SPAC transactions and moved to other places, while regulators' scrutiny of the SPAC market is also strengthening, which makes SPAC transactions less attractive to participants. However, SPAC still has the potential to develop in Asia, as Hong Kong is a leading international financial centre, with both depth and breadth of capital markets, and a large number of institutional investors and professionals, coupled with a world-class regulatory system, which is enough to provide a favorable environment for the development of SPAC.

For the choice between ordinary IPOs and SPAC, the aforementioned Futu investment research team also told reporters that if there is a strong financing demand, choosing IPO is a better path, if it is more necessary to land in the capital market as soon as possible and give more liquidity, then choose SPAC as a good way. Among them, the situation of Chinese stocks is also different, many companies in Chinese stocks are companies with strong cash flow and profitability, and more Chinese stocks return to Hong Kong for listing and are more inclined to IPO financing, so SPAC is not the first choice.

Encourage the development of investment banks in Hong Kong

It is worth mentioning that throughout the history of SPAC development, before 2017, the US SPAC underwriters were mostly small and medium-sized investment banks, and with the outbreak of SPAC business demand, well-known international investment banks such as Credit Suisse, Citi, Morgan Stanley, Goldman Sachs and UBS have joined.

Zhao Hongmei believes that the development of SPAC business requires underwriters to have higher requirements for international business level and cross-border collaboration capabilities, and secondly, the minimum financing amount of SPAC of 1 billion yuan on the Hong Kong Stock Exchange also makes only underwriters with rich experience in overseas investment and financing business, strong investment and research capabilities, abundant capital and large asset management scale have the ability to operate.

Therefore, some industry views believe that in addition to the listed companies themselves, the SPAC mechanism can also incentivize investment banks in Hong Kong to expand their business scope and achieve the upgrade from underwriting institutions to full-life cycle financial service providers.

"In the past two years, the number of SPAC projects listed in the United States has reached nearly 50, most of which are registered in Hong Kong and Chinese mainland, which is the main body that the Hong Kong Stock Exchange hopes to win, and it coincides with the service audience and service advantages of Chinese securities companies, so the Hong Kong stock SPAC mechanism can indeed bring significant development opportunities for Chinese securities companies." Many Chinese securities companies have a good foundation for expanding their SPAC business in terms of business types and service teams. Zhou Lin told reporters.

Up to now, of the 13 companies that have submitted SPAC listing applications to the Stock Exchange, eight of the foreign underwriters have participated in the SPAC, including UBS, JPMorgan Chase, Morgan Stanley, etc., while chinese-funded securities companies are mainly bank-based securities companies in Hong Kong, including CMB International, ABC International, and CMB Capital.

"Judging from the ranking of Hong Kong stock IPO sponsors, in the face of competition from foreign international investment banks, Chinese securities companies are not far behind, and in recent years, they have performed well in the quantity and quality of IPO project services, and have gradually been able to share the same color with foreign securities companies." From the perspective of SPAC business in the Asia-Pacific region, the Hong Kong Stock Exchange has a high degree of trading activity and can win more SPAC opportunities in Hong Kong, Chinese mainland and the Asia-Pacific region. Zhou Lin said.

Zhao Hongmei pointed out in the research report that at present, the securities subsidiaries of Chinese banks in Hong Kong and the overseas branches of the leading securities companies (supervised by the China Securities Regulatory Commission) have advantages in expanding SPAC, and CMB International, ABC International, Minbo Capital, and Haitong International have served as sponsors of different SPCs to carry out the business model of "investment bank + investment", which further improves the requirements for professional capabilities such as investment banking industry research, project identification, and reasonable pricing.

At the same time, it said that after the IPO, securities companies also need to find good M&A targets, conduct independent due diligence, and at the same time, after the transaction is completed, through research coverage, company access, transaction/market making, and continuous M&A and capital market consulting to further services, through comprehensive financial services and extensive business relationship networks to empower post-merger companies, enhance performance opportunities and capital operation space. Therefore, it can be expected that the SPAC business will strengthen the development trend of Investment Banking Strong Hengqiang and concentration to the head in recent years.