Ant Group is on course to become the world's first company to launch a simultaneous initial public offering on Hong Kong's main board and Shanghai's Star Market, creating a template for other firms to follow.

Ant, which began as a payments service for e-commerce giant Alibaba Group Holding, won clearance from regulators on Monday to kick off marketing the Hong Kong tranche of its IPO but is still waiting for the China Securities Regulatory Commission to sign off on the listing paperwork for the Shanghai leg of the offering later this week.

In this explainer, we take a look at how the operator of China's largest mobile payments platform by volume Alipay, is navigating the regulatory process and technical challenges of selling shares in two jurisdictions at the same time.

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Co-hosting IPOs with mainland markets will help Hong Kong keep pace with the swift development of financial hubs in mainland China. Beijing is steadily opening its domestic financial markets to foreign investors and nurturing neighbouring Shenzhen as a technology and financial hub.

What is a dual listing and why does Ant need to list in two markets?

A dual listing refers to a listing of shares by a company in two markets. This is handy for larger listings as issuers can access a deeper pool of potential investors and capital. For Ant, a dual listing is key to success as its bumper IPO is set to smash the record held by Saudi Aramco's US$29.4 billion IPO last December as the biggest share offering ever.

If an issuer markets the listings in two markets at the same time, rather than one after the other, the process gains greater momentum and could result in a higher valuation for the issuer, said industry practitioners.

How many simultaneous dual listings have there been straddling Hong Kong and mainland China's markets?

Ant will be the first to list simultaneously in Hong Kong and Shanghai's 15-month old Star Market.

Before the Star Market's inception in July last year, at least two major state-owned mainland entities have listed on the main board of Hong Kong and Shanghai at the same time.

The Industrial and Commercial Bank of China was the first to do so on October 27, 2006. The nation's largest bank in terms of asset raised US$21.9 billion, the world's biggest IPO ever at the time. China Citic Bank, the nation's seventh-largest lender, came along on April 27, 2007 to raise US$6 billion.

ICBC was the first company to simultaneously list in Hong Kong and Shanghai on October 27, 2006. Photo: Reuters alt=ICBC was the first company to simultaneously list in Hong Kong and Shanghai on October 27, 2006. Photo: Reuters

In both ICBC and China Citic Bank cases, two-thirds of the share offerings were in Hong Kong, with the rest in Shanghai. Ant has not yet decided on the split of its share sale, although people familiar with the matter say it aims to be even-handed.

Can companies dual list in two markets, but at different times?

Yes. There are 127 companies with so-called H-shares in Hong Kong and A-shares in either Shanghai or Shenzhen bourse. All but two of them opted to list in the two markets at different times.

The gap between dual listings could be as small as one day, like the Agricultural Bank of China in July 2010. The widest is over 16 years, when Semiconductor Manufacturing International Corp joined the Star Market in July this year, after delisting itself from the New York Stock Exchange in 2019. It was first listed in Hong Kong in March 2004.

Technically, a simultaneous listing is harder to execute as A-shares typically trade at a premium to their Hong Kong counterparts. As of Friday, all the 127 A-shares were trading at a premium to their H-shares counterparts of between 6 per cent and 86 per cent.

Ant Group has applied for a dual listing in Hong Kong and Shanghai. Photo: Reuters alt=Ant Group has applied for a dual listing in Hong Kong and Shanghai. Photo: Reuters

What are the regulatory procedures for a dual listing?

Listing candidates receive corporate governance training arranged by sponsors before submitting IPO application documents in Shanghai. Ant submitted its application to HKEX and Shanghai's Star market on the same day on August 25.

In Hong Kong, HKEX's listing staff and the Securities and Futures Commission vet the listing application. It must then wait for the CSRC to approve the company's Hong Kong listing before asking its own listing committee to review the paperwork. On Monday, CSRC and HKEX's listing committee both gave the IPO a green light for the Hong Kong tranche to proceed, completing the Hong Kong regulatory review process.

The next step: Ant will post its post-hearing information packs (PHIPs) on the HKEX website. The sponsors will then ramp up marketing of its shares to global investors.

The Shanghai leg of Ant's IPO sped through the initial vetting stages, with the bourse's listing staff submitting questions five days after its application and its listing committee approving the IPO on September 18. Ant is still awaiting approval from the CSRC for the Shanghai leg, which could come later this week, according to sources.

Once the CSRC gives a green light, that will complete the final regulatory step in Shanghai and kick off the offering.

Typically, a smooth listing application in Hong Kong can take six to nine months to complete. Larger listings and those deemed strategically important to the bourse, often enjoy a speedier review process, people familiar with procedures said.

Normally, a listing needs about two years in mainland markets, sometimes longer. However, the Star Market has revamped its process to cut red tape. The current record holder for the fastest approval is chip maker SMIC, which won its go-ahead from regulators in just 18 days and listed its shares on Star Market in 45 days.

Any technical challenges?

Yes! Companies will have to choose whether they want to price on the same day and later list on the same day in two jurisdictions. Ant has chosen to price the Hong Kong and Shanghai tranches of its share sale on the same day and then simultaneously list on the Hong Kong exchange and Star Market a few days later, the people familiar said.

To do this, it will have to bridge a settlement gap in timing between Hong Kong and the Star Market. Hong Kong averages five days, or T+5 as it is known in financial circles, while on the Star market, settlement is within eight working days of pricing. The working solution is for Ant to list on T+6 in both markets, so Hong Kong investors will have to wait an extra day for settlement, the people familiar said.

What risks do companies take attempting a simultaneous dual listing?

The issuer is not in charge of the timetable during the regulatory vetting process and listing in two jurisdictions at the same time heightens the risk of a delay, as well as added costs. This can be calamitous for an IPO during volatile markets.

For Ant, getting the listing across the line sooner is important as financial markets could become more volatile in the wake of the US election on November 3.

There are also additional costs to consider. Listing candidates need to appoint two teams of investment bankers, accountants and lawyers in the mainland and Hong Kong to prepare two sets of accounting statements, prospectuses and other filings to meet with different requirements of the markets. Mainland regulators require only a Chinese-language prospectus but Hong Kong demands both English and Chinese.

"Simply speaking, simultaneously listing is an expensive and challenging process. It will only be suitable for large companies which are able to capture international and mainland investors," said Clement Chan, managing director of accounting firm BDO.

One complication for Ant lies in the post-hearing book building process, which must proceed inside and outside mainland China at the same time.

Are we expected to see more dual listings to happen?

Yes, given the benefits and if Ant's dual listing is a success.

China International Capital Corp (CICC) in September won CSRC's approval for it to list in Shanghai, five years after it listed in Hong Kong in November 2015.

Hong Kong-listed Geely Automobile Holdings, China's largest private carmaker and owner of Volvo Cars, has obtained approval by the listing committee of Shanghai's Star Market for a secondary listing. It is now waiting for the CSRC to give a green light.

More dual listing between Hong Kong and mainland markets are expected to come, especially those by Chinese companies listed in the United States looking for a hedge on worsening relations between the two countries. A group of top US regulators recommended in August that Chinese companies and other foreign issuers that fail to provide access to their audit working papers for oversight be delisted from American bourses by January 2022.

Additional reporting by Chad Bray

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.