Singapore Exchange courts IPOs with contentious weapon
Bourse may be among first in Asia to allow dual-share structure
MAYUKO TANI, Nikkei staff writer
SINGAPORE -- The Singapore Exchange has long promoted itself as the "Gateway to Asia" for international companies and investors seeking funds from the region. The problem is that SGX is steadily losing traffic flow to its rivals, particularly the Hong Kong Exchanges and Clearing.
On Dec. 30, Straits Times Index ended 2016 by closing at 2880.76, a marginal decline of 0.07% from the last trading day of 2015, marking the second consecutive year of declines for the STI.
The lukewarm performance has affected the share price of the SGX itself. On the same day, SGX shares ended at S$7.16, marking a 7% fall from a year ago. The bourse's share price has more than halved from its all-time high of S$17.20 in October 2007.
There is little doubt that Singapore has seen an erosion in its status as a major financial market in Asia, particularly when it comes to stock market trading. This year's decline in the number of companies listed on the bourse has accelerated this slide.
The SGX suffered a net loss of 10 listings in 2016, leaving it with a total of 759 companies, including 575 on the main board and 184 on its secondary market, Catalist.
Among those delisting were several local high-profile names, including Singapore's local mass transit operator, SMRT; the national shipping line, Neptune Orient Lines; and OSIM International, mainly known for its product line of massage chairs.
The five stocks such as Manulife REIT and China Jinjiang Environment Holding that listed on the SGX mainboard in 2016 raised a total of $1.5 billion, according to Dealogic, the financial data provider. That is a far cry from the 25 companies that raised $6.03 billion on the SGX in 2010.
Total market capitalization of SGX's listed stocks at end-2016 stood at S$926 billion ($640 billion), up only 2% from a year ago. At the end of November, SGX was ranked the 21st largest exchange in the world in terms of market capitalization according to World Federation of Exchanges. In contrast, its main regional rival, the HKEx, was ranked 8th in the world and had a market capitalization of $3.2 trillion.
SGX is falling behind Northern Asian peers in terms of the amount of capital raised through initial public offerings. It was ranked 8th in the world in 2013, accounting for 2.9% of the $183 billion in IPOs globally. In 2016, it accounted for only 1.1% of the $141 billion generated by IPOs in the world, with its ranking falling to 18th place, even though the number recovered from the previous year.
Hong Kong remains the top venue in the world for attracting funds from international investors, accounting for 17.4% of the capital raised globally in 2016. The HKEx had to face the aftermath of the 2008 global financial crisis and the economic slowdown in China, but 71 companies still managed to raise $24.4 billion on the HKEx in 2016, although that was down 64% from 2010 when the bourse saw 87 new listings. Hong Kong continues to benefit from a continuous flow of listings from China.
The SGX has also suffered from weaker trading volume over the last several years. The average daily trading volume was S$1.1 billion in the fiscal year that ended in June, down 27% from the 2010 fiscal year. The fall in liquidity and a series of trading system malfunctions has made the bourse less attractive for companies to list.
The SGX could face more problems in 2017. On Dec. 19, talk that Cosco Corporation (Singapore), a shipyard under the China Cosco Shipping Corp group, might delist chilled the market. Share trading in the Singapore-based company was suspended following its Chinese parent's announcement that it would restructure all the group's shipyard-related businesses. This fed speculation that the restructuring, possibly involving mergers and acquisitions, may prompt the delisting of the Singapore unit.
The SGX is now seeking to reverse its downward spiral by taking the bold step of allowing the listing of dual-class shares, an idea that the HKEx shied away from last year. Although it exists in the U.S. and parts of Europe, the dual-share system is virtually non-existent in Asia.
Under this system, one class of shares carries greater voting rights than the other. This gives some shareholders, normally the founder or the owner of a company and the board members and senior management, a greater say in the company's decision-making, despite holding a smaller proportion of shares, which also reduces their financial risk.
Manchester United setback
The SGX began considering the idea after Manchester United, the English Premier League soccer club, abandoned a bid to list in Singapore in 2012. Manchester United was keen on an SGX listing to expand its Asian fan base, while the SGX viewed the listing as an important one that would attract other IPOs from the region. But in the end, the club ditched the plan and chose to list on the New York Stock Exchange because it allowed dual-class shares.
The Hong Kong bourse faced a similar defeat when Jack Ma, founder of Alibaba Group Holding, chose the Nasdaq in New York over Hong Kong when he listed the Chinese e-commerce giant in a mammoth $25 billion IPO in 2014.
The fact that the Nasdaq and NYSE allow dual-class shares has become a magnet for big technology companies such as Google, Facebook and Alibaba.
With dual-class shares virtually absent in Asia, supporters of the scheme in Singapore say the move would put the city-state on the radar screen of global technology companies, while providing more options to investors.
Patrick Grove, the co-founder and chief executive of the Singapore internet company Catcha Group, has called it a "potential game changer" for SGX. Grove, who has taken five of his companies public but none of them in Singapore, said the city-state is "losing out" because it has failed so far to allow dual-class shares.
But others are opposing the idea. Hugh Young, managing director of Aberdeen Asia, a fund management company, has stated that the concept would "subvert investor rights and harm trust in markets". Weighting voting rights, "potentially rob investors of those rights" to voice concerns and influence corporate decisions, he said.
Goh Eng Yeow, a veteran financial columnist at the Straits Times, expressed concerns that dual-class shares may cause more corporate scandals, which would be "injurious" to SGX's reputation. "Dual-class shares raise issues over entrenchment of control," he wrote.
Hong Kong's refusal
Hong Kong considered introducing dual-class shares after losing the Alibaba IPO. After a lengthy study, however, the Hong Kong financial regulator decided in 2015 not to allow it because it wanted to uphold the principle of fairness and transparency by sticking to a "one-share, one-vote" rule.
The SGX management appears determined to push through the plan. In August, the SGX's listings advisory committee, which comprises independent advisors, approved the idea as long as necessary safeguards are put in place. It noted that "Singapore's capital market could become more attractive for businesses run by entrepreneurs to list, thereby providing investors access to a wider range of companies and sectors." Market watchers predict that once the public consultations, which is expected to start in early 2017, the dual share structure will be approved.
Some of the safeguard recommendations offered by the listing advisory committee could be adopted. It proposed that preferential shares should not carry more than 10 times the voting rights of common shares. It said the dual-class share structure should only be applied to "large companies which can attract sophisticated investors".
The SGX "will be quite careful in terms of deciding what kind of companies to be allowed for dual-class shares", said Pong Chen Yih, a Singapore-based principal of Baker McKenzie, the international law firm.
SGX's net profit fell 16% year on year to S$83 million for the first quarter that ended in September due to sluggish stock and derivatives trading. The weak global economy, political uncertainties and expected rate hikes in the U.S. "could also potentially lead to a period of relatively subdued trading volumes if participants decide to adopt a more cautious approach," Loh Boon Chye, the SGX chief executive, warned. That has made the effort to attract more IPOs even more crucial.
SGX's securities market, including issuer services, has long been a pillar of the exchange, producing 2.7 times more revenue than that of the derivative market in the fiscal year ending June 30, 2010. This multiple fell to 1.2 times in the 2016 fiscal year. This was partly due to the growth in the derivatives business, say analysts. That aside, they noted, it is clear that measures to shore up the stock market are necessary to sustain growth.
Dual-class shares are one of several innovations that SGX has embraced in efforts to boost share trading. The bourse is also reviewing quarterly financial reporting requirements and has reduced trading lot sizes.
With the Jan. 20 inauguration of Donald Trump as the new U.S. president, Asian bourses are bracing for possible capital outflow to the U.S.
The year 2017 will see increased efforts by regional bourses to make themselves more attractive. The Stock Exchange of Thailand, for example, is planning to set up a new secondary market to list startups and other small cap companies. The SGX's possible adoption of a dual-share structure will be also watched closely by other regional markets, including Malaysia and Hong Kong.
"All the exchanges will be keen to explore additional products to ensure that they are competitive in attracting companies and investment," Pong said.