Published October 27, 2009

Dual-listings can be a double-edged sword

They can unlock value in some cases, but can add to costs and regulatory hassles

By LYNETTE KHOO

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(SINGAPORE) A slew of dual listings is underway for companies primarily listed on Singapore Exchange. The results of such exercises are currently mixed and this has raised doubts over the theory that dual listing can be a panacea for poor market valuations.

Most industry players believe that dual listings work better for bigger and more liquid companies, and small companies may not attract attention even after incurring additional listing costs in a new market.

'Dual listings make more sense for bigger and more liquid companies because there is already a natural liquidity in these counters supported by an institutional following,' said Allen Cheong, head of equity capital market at Daiwa Securities SMBC Singapore.

'In some cases, the liquidity and interest in the separate market are so strong that it makes sense for the company to consider a listing in that market.'

But the downside in dual listings is that a company needs to double its resources when it comes to conducting investor relations activities, meetings with investors in two markets, and complying with two sets of regulations if the secondary market's regime is stricter.

'In that respect, smaller companies may have their limitations in terms of resources,' Mr Cheong added. 'Smaller companies tend to lack institutional following and hence, the liquidity may not justify the additional cost to maintain the dual listing.'

Amid the recent flurry of SGX-listed companies seeking dual listings, Chinese companies or S-chips have been eyeing the Hong Kong market to tap hot speculative money. More S-chips are also starting to consider issuing American Depository Receipts (ADRs) in the US and Taiwan Depository Receipts (TDRs) to Taiwan's investing public.

In the case of ADR, a company needs to find a sponsor willing to underwrite the ADRs. There are three levels of ADR listing and at levels II and III, companies have to undertake the cost of preparing a separate financial statement to satisfy the US accounting standard.

But some secondary listings have ended in tears. People's Food Holdings, which dual-listed in Hong Kong in late 2002, eventually made its exit from Hong Kong four years later as investors shrugged off the stock.

Creative Technology also delisted its ADRs from Nasdaq in 2007 after suffering from low ADR trades while incurring onerous compliance costs.

'In the US, there may be a lack of interest and profiling, not forgetting the heavy costs of listing compliance in the US, and the lack of visibility because you are a small fish in a big sea,' Mr Cheong said.

But SIAS Research vice-president Roger Tan felt that taking the example of Creative can be misleading given that it was first listed on Nasdaq in 1992 and subsequently on SGX in 1994.

Moreover, some small firms have enjoyed positive effects by using ADR, he said. Mr Tan said that dual listing was a 'signalling' activity that companies undertake to show that their interest is aligned with shareholders.

Many S-chips have been held to ransom by investors' fear of poor corporate governance and as a result, are priced well below their potential value, Mr Tan added. 'For some time, well-managed S-chips have not been able to differentiate themselves from the rest until the idea of a dual listing through ADR came along.'

Westcomb Research said in a note that it expects Sinotel's upcoming ADRs to incur minimal cost as they are the first level of ADRs traded over-the-counter with minimal reporting requirements. Sinotel is also not required to pay its depository bank as it would make commission from transaction of ADRs.

In cases where a subsidiary may present a better investment story for the new market, industry players felt that spinning off the unit for listing may be a shrewd way to unlock value for shareholders.

One company seen doing this is Wilmar International, which is planning to list its China unit in Hong Kong to appeal to investors that are keen on a dedicated China exposure.

Rachel Eng, head of capital markets and corporate department at WongPartnership, noted that a spin-off would make sense if the subsidiary is in a different business and shareholders in the separate markets understand the business well.

In choosing which secondary market to go to, Ernest Kan, head of IPO at Deloitte & Touche said that a company may be misguided if it looks at valuations alone as these could change with the winds, considering how Singapore's valuations were higher than Hong Kong's some five years ago.

But SGX still needs to work on improving market valuations given that it is an important consideration for listing, he added.

Competition from regional bourses is heating up with the latest addition of Shenzhen's Nasdaq-style board ChiNext, which will open trading this Friday with the debut of 28 companies.

Even in the case of secondary listing on SGX, the eight Global Depository Receipts (GDRs) and the 28 secondary listings have been thinly traded. Marcus Chow, director at Drew & Napier notes that it still boils down to valuations.

Mr Kan concluded that what is important is that 'companies look at their fundamentals to see whether their business is more suited for which market'.