Hong Kong may well benefit from the return of Chinese companies from US or European markets, but these initial public offerings (“IPOs”), nevertheless, present new hazards arising from political risk – as the furore over Ant Financial IPO makes clear.

In this context, a new approach for sponsors is necessary, making use of a different and more thorough risk management system, so as to ensure that IPOs stand up to intense scrutiny, now and in the future. The dangers of cutting corners are rising.

Ant Group – Political Risks

On 3 November 2020, China’s regulators summoned Jack Ma to discuss perceived problems related to the Ant Group IPO, thus highlighting how regulatory and political concerns can impede the listing of Chinese businesses – even the most promising and famous.

Ant Group is not alone; Luckin Coffee provides another example. Luckin Coffee apparently sought to use technology to surpass Starbucks in mainland China, and listed with much fanfare on the US NASDAQ in May 2019; its valuation quickly rose to around USD12 billion, as of January 2020.

However, reports in early 2020 suggested that Luckin Coffee had overstated revenues, resulting in an admission of fraud in April 2020, and its delisting from the NASDAQ in June. Investors lost huge sums of money, in short shrift.

The tide comes in

The Luckin Coffee fiasco has prompted the US government to draft a new Holding Foreign Companies Accountable Act, which will require listed companies to declare their independence of foreign governments – a challenge for those with links to state owned enterprises, and, perhaps, an increased incentive to return to Hong Kong from foreign bourses.

The Luckin Coffee and Ant Financial IPOs thus both highlight the dangers of political risk, in addition to standard due diligence concerns, in the context of heightened Sino-US tensions, Beijing’s doubts about capital outflows, and longer term shifts to a “dual circulation” system in mainland China.

The worry, now, is that some sponsors in Hong Kong succumb to temptations to reduce solid due diligence standards, so as to cash in on the opportunities offered by new IPOs in a testing market environment – and that, in doing so, they expose themselves and their directors to harm, and outside investors to steep losses.

How to respond

The key point is that Investigative Due Diligence, as we call it at SVA, should not merely be a technical exercise, whereby spread sheets and legal documents are evaluated in isolation.

Moreover, sponsors should not downplay negative reputational reporting, by focusing on only “publicly available data”, such as that available on Google, or in the media, and thereby “commoditise” the process.

Rather, the process should involve close examination of organisations, and their leaders, and should contribute towards an intimate understanding of the actual status and operations of the business. The exercise should facilitate a “real world assessment” – one that takes into account the current unfriendly political and economic climate.

The risks of complacency are real. All those dealing in securities, inside or outside China, must take such risks into account. Major failures could lead to calls for tighter regulation, criminal penalties against errant sponsors, banks, and brokerage firms, or even a direct, political response from governments – to the detriment of all involved.

How we can help

SVA are specialists in handling IPO, RTO and M&A related investigative diligence, and have supervised hundreds of such assignments across Asia Pacific and beyond. Moreover, we are also specialists at political risk – something now of critical import for listings.

We are also well equipped to offer independent, in depth, dispassionate and practical Investigative Due Diligence in support of the process. Our independence is drawn from the following key factors:

• We do not seek future mandates, banking relationships, accounting or consulting work from our listing targets.
• We report all that we know, and that which we evaluate to be relevant to the process.
• We have no financial interest in whether or not an IPO or other listing is successful; our fees are the same in either event.
• We are not conflicted, in practice, or in theory, and SVA can be relied upon for an independent, objective and fair assessment.
• We have the experience and credibility, based on our principal's 40-plus years of operational experience, in government, and in the private sector in Asia.
• We would sooner walk away from an assignment, than accept efforts to hinder or restrict the scope of our work.
• Our work is recognised by regulators across the region.

Our website www.stevevickersassociates.com has more detail as to IPO investigative due diligence and related matters.

If SVA can be of assistance to your organisation in dealing with these complicated issues, and if you wish to protect your business from the negative consequence of poorly conducted due diligence efforts, do not hesitate to contact us.