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Hong Kong Exchange expects tech volatility to persist, but IPO pipe unscathed

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Hong Kong Exchange expects tech volatility to persist, but IPO pipe unscathed

Hong Kong Exchanges & Clearing Ltd. expects volatility in Chinese technology companies' shares to continue, as investors digest a series of regulatory changes that led to a rout in stocks of internet majors this week and the suspension of the world's biggest IPO earlier in the month.

However, the impact on the pipeline of share sales in the third-biggest listing venue by the amount of funds raised this year may be less significant, HKEX CEO Charles Li said on a Nov. 11 conference call after the company reported record earnings in the third quarter, helped by new listings and trading. Net profit attributable to shareholders rose 51.7% on year to HK$3.35 billion in the September quarter. EPS increased to HK$2.64 from HK$1.75 in the same period of last year.

"We are seeing significant regulatory discussions involving technology companies, particularly in the financial services sector," Li said.

Trading may stay active, and potentially volatile, as the market is still understanding the regulatory changes, he said. Shares of Chinese internet companies tumbled for a second day after the country's market regulator released detailed draft antitrust regulations targeting digital platform economies.

Chinese e-commerce company JD.com Inc.'s shares fell 9.2% in Hong Kong, after an 8.8% decline on Nov. 10. Alibaba Group Holding Ltd. also fell 9.8%, while social media company Tencent Holdings Ltd. shed 7.4% after a 4.4% drop in the previous session. Food delivery operator Meituan Dianping closed 9.7% lower, adding to its 10.5% fall in the previous session.

The draft regulations aim to curb anticompetitive practices by dominant platforms that often squeeze out smaller players, besides targeting customers using their vast swaths of user data. The authorities also want to see if these large players target consumers based on their transaction histories and consumption patterns after complaints by Chinese internet users about price fixing on e-commerce platforms that target new consumers with lower prices.

Approval required

Companies such as Alibaba that operate on a variable interest entity structure with capital raising overseas would also be required to seek approval. The draft antitrust rules come a week after Alibaba associate Ant Group Co. Ltd. was forced to abruptly suspend its proposed twin listing in Shanghai and Hong Kong in what was set to be the world's biggest IPO on record. The exchanges pulled the listing after Ant Group was hit by regulatory and disclosure concerns over its microlending business.

The dramatic halt two days before its scheduled debut underscores the rapid changes in China's regulatory environment for the financial technology sector. Some experts believe it may have a bearing on the fundraising plans by other fintech companies.

"I believe it will prove to be probably the right decision for the company, the market and the investors," Li said in response to a question on the suspension of the Ant Group IPO.

"The market does need time to fully absorb those regulatory changes and hopefully be able to arrive at the right level of clarity that will give everybody an easier and better understanding of companies in that particular space."

He did not say when the IPO may be revived. "When Ant is ready to come back, we stand ready to welcome them," Li said, adding that "like everybody, I am obviously disappointed."

However, the CEO expects the IPO market in Hong Kong to stay "very strong, very resilient" after companies raised HK$215.9 billion on the exchange, making it the third-biggest market for initial share sales so far in 2020. By the number of companies that tapped the market, Hong Kong stands at fourth in the world, with 104 listings in the first nine months of the year.

"In the actual IPO market, we have not seen tangible evidence of anything slowing down," Li said.

During the third quarter, the company's stock exchange listing fees rose to HK$499 million from HK$394 million. Trading fees and trading tariffs climbed to HK$1.92 billion from HK$1.37 billion. Clearing and settlement fees also grew to HK$1.25 billion from HK$777 million, taking total revenue and other income increased to HK$5.31 billion from HK$3.99 billion a year earlier.