S-Chips - Who could be next?

Who could be next, after China XLX? Speculation is widespread post China XLX’s proposed dual listing in HK, possibly in search of better valuation. We attempt to uncover possible names.

Better valuation is key motivator. FTSE China Index has historically traded at an average of 47% discount to Hang Seng CEI (pg 2 chart). But, with valuation gap running as high as 40% and 70%, companies with equally bright prospects and good earnings visibility will find it attractive to list in HK, if depressed valuations do not fairly reflect the underlying assets or potential. Hence, good quality companies would gravitate towards exchanges that offer them the best valuations and investor reception.

Most S-shares would pass financial criteria of HK listing. Most S-shares under our coverage, by virtue of their listing status in Singapore, will probably meet the criteria by HKSE. (see appendix for financial criteria). Other key criteria to clear are accounting standards, jurisdictions, minimum market cap (>HK$200m) and public float (>25%). Epure and China Hongxing likely candidates to venture out.

Epure has a proven track record of earnings delivery to attract interests in HK/ China, where environmental themes are well received by investors. Besides, Epure’s management is familiar with China’s listing. China Hongxing’s huge discount of 70% vis-à-vis HK peers, coupled with its low ex-cash PE of c.1.5x and a net cash of 17.6cents/share looks compelling, in our view.

But not without risks/hurdles. While the benefits of dual listing/ privatization and relisting look appealing, hurdles to consider include the ability to secure funding for privatization, and the ability to relist at a premium thereafter. Companies with dual listing may also need to contend with managing different set of shareholders and the added cost of duplicate listing.

Sponsored Links