Hong Kong a Strong Contender as Aramco Weighs Listing

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The Hong Kong Stock Exchange is shaping up as a strong contender to list Saudi Aramco's shares as the giant oil company prepares to launch the world's largest initial public offering (IPO), with hopes of raising as much as $100 billion. Industry observers tell EI Finance that two factors are likely to play a large role in determining whether Aramco opts for a primary or secondary listing in Hong Kong. The first of these is the price of oil, while the second is Riyadh's relationship with China -- the second-largest buyer of its crude oil and the kingdom's largest growth market. With a total market capitalization of around HK$24.8 trillion (US$3.2 trillion) in mid-2016, the Hong Kong Exchange is no stranger to bringing national oil companies (NOCs) to market, having listed China's three NOCs at the turn of the century. Hong Kong, and its stock exchange, lie at the crossroads of the Western world and China. Since the UK handed control of the territory back to China 20 years ago, it has been governed under the "One China, Two Systems" principle. And over the last year, Beijing has thrown its full support behind Hong Kong's bid to land the Aramco listing. "With China eager to secure long-term supply of commodities, there are obvious political considerations at play here," Philippe Espinasse, a former investment banker and author of IPO: A Global Guide, tells EIF. In addition to a listing in Saudi Arabia, Aramco is expected to seek listings for its stock on two or three other exchanges. From the perspective of an oil company, one of Hong Kong's potential advantages over New York is that disclosure of hydrocarbon reserves is largely governed by the Society of Petroleum Engineer's petroleum resource management system, which allows greater discretion with respect to price expectations. The SPE system permits proven underdeveloped reserves to stay on a company's books for a "reasonable timeframe" as opposed to five years under US Securities and Exchange Commission rules. However, Hong Kong's biggest trump card may be its recognition of "cornerstone investors," which are an established part of the IPO landscape in Hong Kong, but less common in the West (EIF Apr.19'17). This would allow a significant chunk of the shares to be presold, making it easier to execute such a large offering. And it could be especially important given that oil is still trading at roughly half the price it fetched three years ago. "If the oil price remains at such low levels, the only way to get a large capital injection is through cornerstone investors," Gordon Kwan, Nomura Equities' Hong Kong-based chief oil and gas analyst, told EIF. Reuters reported last month that China's sovereign wealth fund CIC has been working with Chinese state banks and state oil companies to put together a consortium that would act as cornerstone investor in the Aramco IPO. On the other hand, if oil prices suddenly strengthened, boosting demand for the IPO, Saudi Aramco might prefer to seek a listing on the London Stock Exchange, which hosts a large number oil companies. Energy stocks -- including Chinese NOCs Sinopec, PetroChina and CNOOC -- has a relatively light weighting of just 6.5% in Hong Kong's main Hang Seng index, compared to almost 49% for the financial sector. Some pundits believe the Chinese market's importance to Saudi Aramco is another factor that could prompt it to seek a listing in Hong Kong, although others disagree. Nomura's Kwan says Aramco may play along with China's pitch for a Hong Kong listing in the hope that this may help reverse a recent decline in Saudi Arabia's share of China's crude oil imports. However, one expert on stock exchanges does not think that this factor alone will determine where Aramco lists its stock. "China has to buy Saudi oil: they need supply security and that means buying from all sources. It is the price of oil which will determine where you buy from," the expert told EIF. He expects the Aramco IPO to be oversubscribed whether or not cornerstone investors are lined up. The Hong Kong Exchange also has some practical limitations. At present, it only trades during Hong Kong working hours, although that could change in the future. Shares are priced in Hong Kong dollars, and even though the currency is fully pegged to the US dollar, currency conversions could hamper trading. Official documents and notices have to be issued in both English and Chinese, with translation potentially causing delays, adding to costs and carrying the risk of errors. Finally, Hong Kong does not allow different classes of shares, meaning that all shares carry the same number of votes. That rule prompted Jack Ma, CEO of Chinese online shopping business, Alibaba, to launch the world's biggest IPO in New York in 2014. Ma raised $25 billion with the Alibaba IPO, opting for New York because he wanted a structure that gave greater voting power to shares held by himself and other founders or the company. The fact that Alibaba listed in the US instead of Hong Kong did prompt some talk about changing the rules in this regard in Hong Kong, but so far this has not happened, Mark Chan, managing partner at H.M. Chan & Co told EIF. At the end of the day, Hong Kong may make the final cut when Aramco makes its decision on where to list. However, it is quite possible that it will only win a secondary listing, as was the case when commodities trading giant Glencore went public in 2011 (EIF Jun.15'11). London was selected as the primary listing and accounts for most of the trading in the company's shares, with hardly any business transacted in Hong Kong.

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