The first SPAC listing in Hong Kong took place on Friday, with nine more planned as the city tries to establish itself as a hub for China- and Asia-focused blank-check companies.
The Aquila Acquisition Corp. offer, which raised around $128 million, came amid a period of extreme volatility for Chinese stocks, fuelled by a variety of concerns including prospective US delistings, Covid-19 lockdowns, and the Ukraine conflict. The Hang Seng Index in Hong Kong has lately hit multi-year lows and recorded its largest rally since 2008.
SPACs are cash shells that raise money from public investors and list on a stock exchange before looking for private companies to merge with.
Although regulators in the United States have intensified oversight of these investment vehicles following a rush of activity, they have been billed as a simplified alternative to initial public offerings.
Nine more SPACs have applied for Hong Kong listing, backed by a group of largely Chinese investors and entrepreneurs. Wei Zhe, a former executive at Alibaba Group Holding Ltd.; Li Ning, a Chinese gymnast-turned-sportswear tycoon; and Norman Chan, a former central banker who helped Hong Kong navigate the Asian financial crisis, are among the supporters.
Blank-check acquisitions are considered as particularly durable since investors can vote on proposed mergers and demand their money back.
According to Eliot Fisk, a consultant and the former head of Asia equity capital markets syndicate at JPMorgan Chase & Co. “It’s probably one of the few things that you could price in a market backdrop like we have this week,” referring to Hong Kong SPACs.
SPAC investors have downside protection thanks to voting and redemption rights, according to Michael Jiang, chairman of Aquila and general manager of its backer, CMB International Asset Management Ltd.
In Mr. Jiang’s words, “SPACs are a flexible investment tool and have unique value for investors in the current market condition.”
Aquila, which is named after the eagle constellation, looks for merger targets in Asia, with an emphasis on China, in new-economy areas such as renewable energy, life sciences, and advanced technology. The deal was “moderately oversubscribed,” according to the company, with 99 investors, including 40 institutions, taking part.
Even as interest in the United States dwindled, Singapore and Hong Kong jumped on the blank-check bandwagon last year, releasing rules following public consultations. Both cities attempted to strike a compromise between embracing SPACs’ flexibility and safeguarding investors’ interests.
Since September, when the vehicles were first allowed, Singapore has hosted three SPAC listings.
SPAC listings have been permitted in Hong Kong since the beginning of this year. Problematic shell corporations have long plagued the city’s markets, prompting the exchange operator, Hong Kong Exchanges and Clearing Ltd., to impose rigorous requirements for such transactions.
Should Investors Be Wary of the Blank-Check Boom?
To avoid the typical IPO procedure and acquire a public listing, private companies are flocking to special-purpose acquisition companies, or SPACs. The Wall Street Journal outlines why some opponents believe investing in these “blank-check” enterprises isn’t worth the risk.
Only professional investors—that is, institutions or individuals with investment portfolios worth at least $8 million Hong Kong dollars, or about $1 million—can subscribe to and trade SPAC shares. Individual investors can only buy and sell shares once a target company merges with a SPAC and goes public.
Aquila stock traded at a low level on Friday, with only HK$17.5 million worth of stock changing hands, or roughly $2.2 million. According to FactSet, the stock ended the day 3.2 percent lower at HK$9.68.
CMB International Asset Management, based in Hong Kong, is Aquila’s backer and manages $3.2 billion in private equity, stocks, and bonds as of the end of 2021. It is a subsidiary of China Merchants Bank Co., which is partly owned by China Merchants Group, a state-owned conglomerate.
Mr. Jiang stated that when Aquila has merged with a target, the asset manager intends to create a second SPAC. In his words, “We hope that SPACs will become a recurring part of our business. There are many Chinese startups looking to list in Hong Kong. Many of them will find SPACs an attractive avenue to achieving that.”
Hong Kong First SPAC Listing: Aquila Shares Slip
The first special purpose acquisition company (SPAC) to list in Hong Kong, Aquila Acquisition Corp, had its shares fall on Friday as the city’s bourse touted “a new route to market.”
With only one live trade throughout the day, the stock fell to HK$9.70 on its first day of trading, down 3% from the offer price of HK$10 apiece. According to Refinitiv statistics, there were two more cross trades.
SPAC listings were approved by Hong Kong regulators in January, and nine other SPACs have since filed to follow Aquila’s debut, which raised little under $130 million.
Aquila shares, on the other hand, had a quiet day due to retail investor restrictions and what market observers described as a lack of experience with SPACs.
Professional investors are permitted to trade the shares, but must demonstrate to their brokers that they meet regulatory conditions limiting the purchase and sale of SPAC shares.
Market participants said Hong Kong intended to entice mainland Chinese investors by listing SPACs, or companies that raise money to buy private companies and then sell them to the public without going through a regular Initial Public Offering (IPO).
Following a spike in ‘blank cheque’ companies listing in the United States, Singapore became the first major Asian market to allow SPACs to trade. However, a number of those U.S. companies are now trading underwater, putting a damper on global investors’ interest for such deals.
The Hong Kong Exchanges and Clearing Ltd (HKEX) applauded SPAC’s debut on the main board of the exchange.
In a statement, HKEX Chief Executive Officer Nicolas Aguzin said, “It gives a new route to market for issuers (and) further diversifies our listing offering.”
Aquila claimed in filings that it raised HK$1 billion ($128 million) by issuing 100 million Class A shares at HK$10 each, along with 50.03 million warrants, for a total of HK$1 billion ($128 million). It stated that it plans to seek out partnerships with companies in new economy sectors such as green energy.
According to the documents, a total of 99 investors subscribed into the Aquila SPAC, with 40 of them being professional institutional investors.
As the shares failed to trade, Steven Leung, sales director at UOB Kay Hian, remarked, “It is new on the market and is merely a shell.”
“It may take a while for investors to get used to it and until sentiment for SPACs heat up again. And there are restrictions for retail investors, they cannot simply jump into it like other stocks.”
Retail investors are unable to purchase SPAC stock until the company completes an acquisition, limiting the amount of investors who can trade the stock.
Meanwhile, according to Reuters, Chinese investment banks registered by the China Securities and Regulatory Commission (CSRC) have been forbidden from acting as SPAC promoters in Hong Kong.