Entrepreneurial State Bank Makes Hong Kong's First SPAC Application

Key takeaways:

• Aquila Acquisition has applied to become Hong Kong’s first SPAC listing, formed by a group connected to China Merchants Bank
• Investors must put up at least $128,000 to buy the SPAC’s shares, which may be too high to create a vibrant market

By Jony Ho

Just a month after unveiling plans to allow listings using Special Purpose Acquisition Companies (SPACs) that are all the rage now in New York, Hong Kong has received its first application for what could become its first such listing. Not surprisingly, it comes from one of the growing number of Chinese companies that are increasingly finding a comfortable place on Hong Kong’s stock exchange.

Drum roll please: And the first company to be listed on the Hong Kong SPAC market is Aquila Acquisition Corp., which is co-sponsored by CMB International Asset Management Limited (CMBI) and AAC Management Holding Ltd., according to their IPO application.

CMB International is the investment flagship of Shenzhen-based China Merchants Bank (3968.HK; 600036.CN), considered one of the most entrepreneurial banks in China, with the centrally-owned China Merchants Group as its controlling shareholder. Meanwhile, AAC is owned by CMBI management. Joint underwriters of the listing are CMBI Capital Corp. Ltd. and Morgan Stanley.

Aquila has three executive directors for now, all CMBI executives who are also shareholders of AAC Management.

SPACs are shell companies containing nothing but cash. Once they become publicly traded, they acquire a private company by issuing additional shares, a process that produces a real publicly traded company. Although established in the U.S. as early as 1993, the listing method has only become popular in recent years.

Only 59 SPACs went public in the U.S. in 2019. But just a year later, as the world struggled under the weight of the global pandemic, the number surged to 248, raising $78 billion. Last year it rose further still, more than doubling to 613 SPACs that raised $162.4 billion.

A Reuters analysis attributed the rise of SPACs during the pandemic to low interest rates, combined with the successful development of Covid-19 vaccines. That combination stoked dreams of an economic recovery, stimulating investor appetite for risk and greatly increasing willingness to speculate.

From the perspective of a real company seeking a public listing, SPACs are attractive because they are more flexible than traditional IPOs, and involve less regulation and lower listing expenses.

Aquila’s prospectus shows it was established with the sole purpose of merging its business with one or more companies. It will target acquisition companies in Asia, especially from China, focusing on areas like green energy, life sciences and advanced technology. Such new economy sectors are development priorities for Beijing, showing that CMBI is seeking to help China attain its policy objectives.

According to Hong Kong’s SPAC listing rules that took effect Jan. 1, Aquila will need to announce a target company within 24 months and complete the transaction within 36 months of its listing date. When the acquisition is completed, the traded entity will become an ordinary listed company open to all investors.

High entrance fee

Aquila has no operating or financial history and won’t begin operations until it is listed and funded, meaning investors have no basis for gaging the company’s ability to complete the acquisition, according to the risk factors in its prospectus. What’s more, it said, the company may not be able to complete the transaction within 36 months of the listing. Such cautionary words show that investors in the SPAC would be betting entirely on its promoters to get the deal done, banking on their investment experience more than anything else.

Aquila’s offering price is HK$10 per share, with individual investors required to fork up at least HK$1 million ($128,000) to buy shares. That entrance fee is deliberately high to keep retail investors out of the Hong Kong SPAC market, unlike the U.S. and Singapore where anyone can play. Hong Kong SPACs are restricted to professional investors, and their shares must be allocated to at least 20 professional investors. Their initial offerings must raise at least HK$1 billion.

As the Chinese saying goes, you should keep all the richest water for your own fields. As China’s international financial center, Hong Kong is taking that message to heart by developing SPACs to attract participants not only from the huge mainland market, but also from neighboring Southeast Asia.

Lining up to list

Five to six Chinese consortia are preparing Hong Kong SPACs this year, according to local media reports. Those include Chunhua Capital and the investment subsidiary of the Agricultural Bank of China International, which are in discussions with JPMorgan Chase to create a Hong Kong SPAC that plans to target companies from the consumer sector.

Anticipating Hong Kong’s move, Shuang Rongqing, chairman of Beixiang Investment and also known as “The SPAC King,” opened a private company called “SPAC International Financial Center” in Hong Kong last November and is its director.

Bexiang has launched more than 20 SPACs in the U.S., including one that ultimately helped UCommune International UK, once considered the WeWork of China, go public. Many believe the participation of Shuang and other experienced investors should help to quickly fire up Hong Kong’s SPAC market. Some had predicted

Bexiang Investment might even be first to launch a Hong Kong SPAC, though it was ultimately beaten out by CMBI.

Even if Aquila is successful, a boom for SPACs in Hong Kong may still be a ways off, said Wan Kong Shing, vice president of iFast Global Markets. “The entry barrier for Hong Kong SPACs is too high, with a lack of retail investors to drive the market,” he said. “Professional investors may not want to see their funds locked up for as long as 36 months to find out the result of the acquisition.”

For those reasons, Wan said he is taking a wait-and-see attitude, preferring to observe the performance of a few more SPACs before making plans to participate in the market.

He added that as a commercial bank with a state-run background, China Merchants Bank’s selection to sponsor Hong Kong’s first SPAC is highly symbolic, showing the central government’s support for the development of the Hong Kong stock market.