Wu Jiehuan, the listing manager of the Hong Kong Stock Exchange: Optimizing the ratio of bookbuilding and allocation in the new stock market can balance the distribution between institutions and retail investors, and enhance pricing accuracy.

On August 1st, the listing director of HKEX, Katherine Ng, introduced the new stock market pricing optimization measures that HKEX is about to implement. She stated that if there are not enough price setters in the new stock pricing mechanism, the price set may not be accurate enough, leading to significant fluctuations in the stock price after the company goes public. HKEX now requires that at least 40% of the shares issued for sale must be allocated to the bookbuilding portion of investors. The clawback mechanism has also been revised to ensure a balanced distribution of shares among institutional investors, global investors, and retail investors in the new stock issuance. Ng pointed out that over the past twenty years, there have been significant changes in the structure of retail and institutional investors. Twenty years ago, the market in Hong Kong was mostly dominated by retail investors, with institutional investors accounting for less than half of the market. However, currently, nearly ninety percent of trading activity in the Hong Kong market comes from institutional investors. Therefore, the authorities hope to establish a more flexible, clear, and transparent framework for new stock pricing and share allocation for issuers and investors. Therefore, in formulating regulations, consideration must be given to the changing degree of institutional investor participation, and appropriate rule adjustments must be introduced, especially as the Hong Kong market has attracted increased attention from international capital in recent years, and more overseas institutions are participating, the listing system also needs to be upgraded in accordance with market trends. Podcast content as follows: Thomas: Host Cen Guoyu (Thomas) Katherine: Guest Katherine Ng, Listing Director of HKEX (Katherine) Thomas: Katherine, HKEX has just announced a consultation summary on the new stock market pricing mechanism and public market regulations. Can you briefly explain to us the impact of the optimized new stock market pricing mechanism on issuers and investors, and how these measures will strengthen Hong Kong's competitiveness as a preferred listing venue and international financial center? Katherine: We are pleased to finally be able to announce this summary of the new stock market pricing mechanism, which we have been preparing for several months. During the consultation period, we received many opinions from market participants, and we sincerely thank all those who provided feedback. Let me explain the optimization measures: first of all, I would like to talk about some historical background. The new stock market pricing mechanism in Hong Kong has not changed for over twenty years, to be precise, it has been 27 years. However, the backgrounds and situations of our issuers and investors have changed significantly over the past twenty years, so we hope to establish a more flexible, clear, and transparent framework for issuers and investors in terms of new stock pricing and share allocation. Thomas: The current mechanism has been in place for over 25 years, what changes have occurred in our market that necessitate these adjustments? Katherine: Looking back at the new stock offerings in the 1990s, the trading volume was often relatively small, and individual investors were the main participants; whereas today, new stock trading volumes are often 5 to 10 times larger than before, with more international investors and institutional investors involved. For recent large-scale new stocks, most cornerstone investors and institutional investors in the bookbuilding portion come from overseas markets. Our system also needs to be adjusted to meet the needs of international investors. When the current mechanism and regulations were established, institutional investor participation was lower. Twenty years ago, our market was mainly dominated by individual investors, with institutional investors accounting for less than half of the market. However, at present, nearly ninety percent of trading activity in the Hong Kong market comes from institutional investors. Therefore, in formulating regulations, consideration must be given to the changing degree of institutional investor participation, and appropriate rule adjustments must be introduced to ensure a balanced distribution of shares among institutional investors, global investors, and retail investors in new stock offerings, especially as the Hong Kong market has attracted increased attention from international capital in recent years, and more overseas institutions are participating, the listing system also needs to be upgraded in accordance with market trends. Thomas: With the composition of issuers and investors now different from the 1990s, how do we ensure that new stock pricing remains fair and accurate? Katherine: Let me first explain the roles played by different parties in the pricing process. Basically, individual investors are price takers, regardless of the final price of the new stock, individual investors have to buy at that price; whereas institutional investors in the bookbuilding portion can negotiate with the issuer during the pricing process, they can bargain with the issuer, tell the issuer at what price they are willing to buy, and how many shares they are willing to subscribe. Therefore, if there are not enough price setters in the new stock pricing mechanism, the price set may not be accurate enough, leading to significant fluctuations in the stock price after the company goes public. In light of this, HKEX now requires that at least 40% of the shares issued for sale must be allocated to institutional investors in the bookbuilding portion, and the clawback mechanism has been revised. Thomas: What revisions have been made to the clawback mechanism? How was the model in the consultation summary determined? Katherine: The revisions we have made will provide issuers with greater flexibility. Under the current mechanism, the issuance of new stocks will trigger the clawback mechanism if there is an oversubscription multiple in the public offering, so institutional investors cannot determine how many shares they will be allocated in the bookbuilding portion until the public offering is completed, causing uncertainty. In cases of high enthusiasm in the public offering, issuers may allocate up to 50% of the shares to the public offer portion. To allow issuers, institutional investors, and retail investors to more accurately anticipate and control the allocation situation, we have added an option in this revision - issuers can choose a distribution scheme without a clawback mechanism and allocate a minimum of 10% of the shares to the public offering portion (this percentage is higher than the initial allocation proportion with a clawback mechanism); issuers can also choose a distribution scheme with a clawback mechanism, similar to the current mechanism, where the initial allocation proportion of shares to the public offering portion is 5%. We have received many opinions on the limit allocation proportion of the clawback mechanism, so it has been decided to significantly increase this proportion from the originally proposed 20% to 35%. After introducing these two schemes, issuers can more flexibly allocate shares in the public offering. If issuers wish to introduce more individual investors as shareholders, they can even allocate up to 60% of the issuance shares to the public offering portion for individual investors, more than the previous clawback mechanism limit of 50%. The clawback mechanism we are proposing now takes into account the opinions of market participants and will make Hong Kong more competitive in the international market. Thomas: The new regulations under the "Listing Rules" will soon come into effect, why is there such an arrangement? Katherine: As everyone has seen, the current new stock market is very active, with a record number of applications in progress. The purpose of this reform is to enhance the new stock pricing and allocation mechanism, so we hope to implement the new rules as soon as possible, so that more companies applying for listing can benefit without missing the opportunity to issue new stocks. Thomas: Additionally, I understand that we will introduce a tiered initial public shareholding requirement based on the market value of the company at listing. Can you explain this proposed revision? Katherine: The current 25% threshold for initial public shareholding is a rule set many years ago, and a single percentage lacks flexibility and is much higher than other international exchanges. Our market is now witnessing more and more companies with significant market value going public, and in these cases, a 25% shareholding may involve a significant amount of capital. Therefore, we will introduce a tiered initial public shareholding requirement based on market value to provide clearer reference guidelines for companies applying for listing, attracting them to list in Hong Kong. In fact, many companies may not want to sell a large number of shares to raise capital at the initial public offering, but may prefer to find another opportunity after listing based on their own development needs to issue shares or make other capital arrangements. We have also seen many successful examples. As for A+H-listed companies, considering that these companies also need to comply with the public shareholding requirements of the A-share market, HKEX has adopted a more flexible standard for the initial public shareholding requirement in Hong Kong for them. At the same time, we have introduced an initial public float requirement to ensure that these companies have enough shares available for trading in the market after the IPO. These new regulations not only conform to international practices but also enhance the attractiveness of Hong Kong's listing mechanism. Thomas: We will also conduct another consultation on the continuous public shareholding requirements, can you explain the reason for this? Katherine: With more and more large companies listing in Hong Kong, requiring them to comply with a 25% continuous public shareholding requirement to maintain their listing status may not be flexible enough and may be unfavorable for listed companies in managing capital. Last year, we introduced the treasury shares mechanism to allow companies more flexibility in managing capital and safeguard the best interests of companies and their investors. Therefore, we are currently consulting the market on how to further optimize these provisions in the "Listing Rules," while also aiming to fully protect shareholder rights. We welcome feedback on this matter. These optimizations will align Hong Kong with global international standards and increase our competitiveness. Thomas: Finally, Katherine, are there any other initiatives that HKEX is working on to optimize the listing mechanism or enhance the market? Katherine: In order to enhance Hong Kong's market competitiveness and improve the listing system, we have introduced many large and small listing reforms. This optimization of the new stock market pricing is just one of the many tasks we are undertaking. We are working with market participants and regulatory authorities to consult on how to enhance the overall competitiveness of the Hong Kong listing system, and we expect to officially start the consultation in a few months, so stay tuned. Thomas: Thank you, Katherine, for sharing your insights on the optimization of the new stock market pricing process today. I hope that our listeners and market participants will further understand these important changes in the Hong Kong market and the intentions behind them: to ensure that our listing framework keeps pace with the times, solidifying Hong Kong's position as a market that is open, transparent, and attractive to issuers and investors globally.