Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Corporate Insights.

24 March, 2013

2012 saw a lacklustre IPO market in Hong Kong. Listings of equity securities dropped from a peak of 106 new listings in 2010 to 50 new listings on the Main Board in 2012. Along with the decline in the number of listings, there was a noticeable increase in the number of cornerstone investments. 


Cornerstone investment trends


Cornerstone investors are investors who agree to buy a preagreed amount of the international placing shares on offer in an IPO. They are also known as “strategic investors”. While initially in Hong Kong, cornerstone investors were commonly the city’s tycoons, nowadays, the profile of cornerstone investors has evolved to include investment funds, stateowned corporations and other companies within the same industry. For example, in the listing of Zhengzhou Coal Mining Machinery Group Company Limited (“Zhengzhou Coal Mining“), the cornerstone investors included a subsidiary of China Huadian Corporation, a PRC state-controlled entity, which is the controlling shareholder ofHuadian Fuxin Energy Corporation Limited (which listed in Hong Kong in June), while another cornerstone investor in that listing was a company in the same industry (namely, a wholly-owned subsidiary of Inner Mongolia Yitai Group Co.Ltd., which is also the controlling shareholder of Inner Mongolia Yitai Coal Co., Ltd. (“Inner Mongolia Yitai“) which listed in Hong Kong in July).


We also saw an increase in the number of cornerstone investors per listing, with The People’s Insurance Company (Group) of China Limited (“PICC“) leading with 18 cornerstone investors and 17 bookrunners, which is a record for recent times in Hong Kong. The following 2012 IPOs were particularly noteworthy for their heavy underpinning by cornerstone investors:


Name Listing date
Number of
% of offer
shares (approx.)
Sunshine Oilsands Ltd 1 March 3 60.4%
Huadian Fuxin Energy Corporation Limited 28 June 6 65.5%
China Nonferrous Mining Corporation Limited 29 June 3 28.5%
Xiao Nan Guo Restaurants Holdings Limited 4 July 1 33.3%
China Aluminum International Engineering
Corporation Limited
6 July 3 54.2%
Inner Mongolia Yitai 12 July 7 42.9%
PICC 7 December 18 58.7%
China Machinery Engineering Corporation 21 December 5 33.0%


While having strong cornerstone involvement in an IPO can be seen as an indication of confidence in the issuer, it can equally suggest a lack of confidence that there will be sufficient market demand. From an investor’s perspective, it is sometimes questioned why a company would launch an IPO if a significant proportion of the offer shares are reserved for a small number of selected investors, with the added worry that with cornerstone investors taking potentially such a large proportion of the offer shares, the liquidity in trading of the company’s shares after listing may be adversely affected.


On the other hand, the cornerstone investors may well counter that amid poor market sentiment, they are often locked-in and are exposed to market risk. Cornerstone investors are usually restricted from disposing of their shareholdings for up to 12 months following the listing date, although carve-outs for transfers to other wholly-owned members of a cornerstone investor’s group of companies
are often permitted.


With the relatively weak Hong Kong IPO market in 2012 behind us, the outlook for the 2013 market remains cautious due to the volatility of the global markets, so it remains to be seen whether this trend in cornerstone investors taking bigger tranches in an offering will continue, or if the trend will decline as more listings come back to the Hong Kong market along with a return of investor confidence.

With the increase in the number of cornerstone investors, we have also seen several disclosures this year of cornerstone investors pledging their subscription shares to secure financing for the investment.

Most recently, one PICC cornerstone investor, Munsun Financial Investment Fund LP, pledged all of the H shares it subscribed as security for a loan of US$40m, out of a subscription price of US$140m. Also, in the listing of Inner Mongolia Yitai, it was disclosed that two of the cornerstone investors, Reignwood International Investment (Group) Co. Ltd. and King Link Holding Limited, pledged their H shares for the purposes of obtaining funding for their respective investments.

One of the seven cornerstone investors in the listing of Zhengzhou Coal Mining, Topful Holdings Limited, pledged its H shares as security in favour of an authorised institution for a commercial loan. 


Placing Guidelines – share allocation to “connected clients” or clients of lead broker

Under the Placing Guidelines, no allocations are permitted to “connected clients” of the lead broker or of any distributors without the prior written consent of the Stock Exchange. A “connected client” of a lead broker or distributor includes (a) its substantial shareholders, (b) its directors, and (c) any company which is a member of the same group of companies as the lead broker or distributor. The rationale for this prohibition is to ensure that shares placed in an IPO go to independent investors and not parties related to the lead broker or distributor acting on the listing, who may be given preferential treatment.


Paragraph 8 of Appendix 6 also provides that neither the lead broker nor any distributor may, under normal circumstances, retain for its own account any material amount of the securities being placed. Where there is public demand, neither the lead broker nor any distributor may retain more than five per cent of its respective shares of the total placing. However, where securities are made available by the lead broker to the general public by application direct to the lead broker and there is insufficient public demand, the amount not taken up can be redistributed to clients of the lead broker.


There were two listings of interest in 2012 which touched on allocations to “connected clients” and redistribution to clients of the lead broker.

In the listing of Inner Mongolian Yitai, the company was granted a waiver by the Stock Exchange from strict compliance with the restrictions on the allocation of offer shares to a “connected client”. This was to allow the allocation of H shares in the international placing to the Government of Singapore Investment Corporation (“GIC“), which held 16.35% of the shares in China International Capital Corporation Limited, the parent company of China International Capital Corporation Hong Kong SecuritiesLimited (“CICC“), one of the joint sponsors, jointbookrunners and joint lead managers for the company in that listing. GIC was a “connected client” of CICC by virtue of it being a substantial shareholder of a lead broker and distributor in the offering. Grounds for seeking the allocation included that it would not have undue influenceon the future share allocation process or cause any unfair treatment to other investors. The waiver was granted on the conditions that GIC would be allocated shares only when (i) there was insufficient public demand and the offering was not fully subscribed at the bottom of the indicative price range, and (ii) information of the allocation would be disclosed in the allocation results announcement. However, the results announcement showed that although the Hong Kong public offering was not fully subscribed and that shares were re-allocated to the international placing, the international placing was moderately over-subscribed, so the conditions to the waiver were ultimately not met.


In Zhengzhou Coal Mining, it was disclosed in the results announcement that the final orders were for less than all of the offer shares available, so approximately 12.8% of the international offer shares that were not subscribed were taken up by the three joint global co-ordinators or their affiliates (the affiliates being connected clients for the purposes of Appendix 6). There are two points to note:


(1) this demonstrates the operation of paragraph 8 of Appendix 6, which permits the redistribution of securities to clients of the lead broker where the securities are made available by the lead broker direct to the general public where there is insufficient public demand; and


(2) the shares must be distributed to clients of the lead broker and not be held by the broker for its own account. This is in accordance with Listing Decision HKEx-LD-54-3 (published in 2006) which considered whether and under what conditions consent would be given to enable connected clients of a distributor to subscribe for and hold shares in a global offering. The Stock Exchange allowed the allocation of shares to connected clients (in that case, companies within the distributor’s parent group of companies) to hold the shares for independent public investors, but the allocation was made subject to certain conditions, including the disclosure of the connected clients and their allocations in the results announcement. That listing decision also prohibited the allocation of shares to one of the group companies which intended to hold the shares for its own account. Accordingly, in Zhengzhou Coal Mining, the results announcement duly disclosed the number of international offer shares allocated to each of the three named joint global co-ordinators, and also confirmed that save as disclosed, none of the underwriters, their respective affiliated companies, and the connected clients of the lead broker or of any distributors has taken up any offer shares for its own account under the international offering.


Hard underwriting


The market was also surprised in 2012 by the disclosure of a number of hard underwriting arrangements. 


A hard underwriting is when an underwriter commits to buy a fixed amount (normally by value) of the offer shares which have not been taken up in the public offering. It is usually subject to a condition that the final offer price is priced at the lower end of the indicative offer price range. By contrast, in Hong Kong, an underwriter in an international offer is normally only committed to subscribe shares that are not taken up once the pricing supplement is signed. Therefore if an offer is not fully subscribed, the underwriters may decide not to execute the pricing supplement. An additional fee is charged by the underwriter for hard underwriting arrangements. These arrangements are usually seen when there is weak market sentiment and demand for an offering is low, so the additional fee is a form of incentive for the underwriter to secure the additional committed  underwriting (and take the risk of being left with the “stick” of unsubscribed shares).


Guidance Letter GL34-12 was issued by the Stock Exchange in April 2012 which provided guidance on disclosure of hard underwriting in listing documents. Soon after the issue of this Guidance Letter, hard underwriting arrangements were disclosed relating to the following listings:



  • China Aluminum International Engineering Corporation Limited – GF Securities (Hong Kong) Brokerage Limited entered into a hard underwriting agreement whereby if the global offering were undersubscribed, the underwriter would subscribe, or procure subscribers, for up to US$20m of H shares not placed by any other underwriters. Ultimately, this was not called on because although the Hong Kong public offer was not fully subscribed, the unsubscribed shares were re-allocated to the international placing, which was moderately over-subscribed;
  • Inner Mongolia Yitai – China Merchant Securities (HK) Co. Limited entered into a hard underwriting agreement with the issuer to procure purchasers to purchase or, failing which, to commit to purchase offer shares with a value up to US$100m. One of the conditions was that the offer price be set at the low end of the indicative offer price range. The Hong Kong offer was not fully subscribed, so the balance was re-allocated to the international placing; and
  • Xiao Nan Guo Restaurants Holdings Limited – an additional underwriting agreement was entered into with Guotai Junan Securities (Hong Kong) Limited which agreed to assume, on a fully underwritten basis, a commitment for approximately 22.72% of the offer shares. In this listing, both the Hong Kong offer and the international offers were moderately over-subscribed. 


While it can be seen from last year’s prospectus disclosures that a weak market was anticipated, hence the increase in hard underwriting arrangements, ultimately, these arrangements were not invoked.


Latest practicable date and liquidity disclosure in a listing document


In June 2012, the Stock Exchange published Guidance Letter GL38-12 on the latest practicable date for ascertaining information in a listing document, and the latest date for liquidity disclosure. In a related publication, Guidance Letter GL37-12, which was also published in June 2012, the Stock Exchange largely consolidated previous guidance to practitioners regarding disclosure of indebtedness, liquidity, financial resources and capital structure in the listing document.


Under the General Principles of the Listing Rules, potential investors must be given sufficient information so as to enable them to make a properly informed assessment of the issuer, and in terms of presentation of information, the information contained in any announcement or corporate communication must be accurate and complete in all material respects and must not be misleading or deceptive. These two Guidance Letters serve to remind applicants to provide sufficient information to investors and of the Stock Exchange’s expectations that directors and sponsors have performed sufficient due diligence to ensure the accuracy and completeness of information in a listing document, and to include up-to-date information.


The guidance letters provide that:


  • (a) the latest practicable date in a listing document (ie, the latest date for inclusion of up-to-date information and for disclosures to be made) is a date no more than 10 calendar days before the date of listing; 
  • (b) the latest practicable date for liquidity disclosure (ie, a statement to be included in the listing document of the applicant’s indebtedness (or appropriate negative statement), liquidity, financial resources and capital structure, if material) to be a date no more than twomonths before the date of the listing document; and
  • (c) the indebtedness statement (ie, a statement as at the most recent practicable date of the total amount of debt securities, borrowings, indebtedness, mortgages, contingent liabilities and guarantees of  the new applicant on a consolidated basis) should be a date no more than two months before the date of the listing document.


The Listing Rules also require a statement by the directors of any material adverse change in the financial or trading position of the group since the end of the trading record period (or a negative statement). Previously, the “Summary” and “Financial Information” sections of a listing document contained such a statement for the period from the end of the trading record period up to the latest practicable date in the listing document. However, the Guidance Letter explains that this requirement has been tightened and the confirmation must now be from the end of the trading record period up to the date of the listing document.


From a practical perspective, it used to be the case that a bring down due diligence call would be held on the latest practicable date in order to ensure that the no material adverse change statements can be given as at the latest practicable date on those sections. However, as a result of the latest Guidance Letter, bring down due diligence should now be carried out up to the date of the listing document, which means immediately before the bulk-print process goes ahead. This is so that the market is provided with the most up-to-date information, which is also in line with the Stock Exchange’s expectations that directors and sponsors have performed sufficient due diligence, and that the information in the listing document is accurate.



For further information, please contact:


Jamie Barr, Partner,  Hogan Lovells

Comments are closed.