It’s reported that the approval rate for initial public offerings (IPOs) on China’s A-share market has tumbled to 36 percent this year from 78 percent previously. Many applicants have waited for three or four years and still got rejected.
But Foxconn Industrial Internet’s IPO quest looks secure.
Though there are a number of listing criteria the Foxconn subsidiary is not able to meet, the group is widely expected to get exemption treatment, mainly because of its leading status in the electronics product manufacturing industry, but also for political reason.
Let’s go over the history of the group briefly.
In 1974, Terry Gou founded Hon Hai Plastic in Taiwan and later changed the company name to Hon Hai Precision Industry in 1982. This became the holding company of the group.
Gou then set up Foxconn on the mainland as a subsidiary to handle OEM business in the same year.
In 2005, the company spun off some business units to form Foxconn International Holdings (02038.HK) and listed it in Hong Kong. While this unit is often mixed up with Foxconn on mainland, they are very different.
The Hong Kong unit is much smaller in size and has not been doing well at all in recent years. Renamed as FIH Mobile Ltd. in 2013, the company expects to book a loss in excess of HK$4 billion for 2017. The market value of FIH Mobile is merely HK$17.5 billion.
By contrast, following a restricting exercise of Foxconn in mainland China, Foxconn Industrial Internet was established in 2015. This company reported sales revenue of 354.5 billion yuan and 15.9 billion yuan of net profit last year.
The company mainly engages in OEM of electronic products. About 73 percent of its revenue is generated from five top customers, including big names such as Apple, Amazon and Huawei.
It plans to use the proceeds of the flotation to fund eight new projects, which will cost a total of 27.3 billion yuan.
Foxconn Industrial Internet has filed application for listing on the Shanghai Stock Exchange. Marking the first large Taiwanese company IPO in China’s domestic stock market, the deal has strong political implications, and is seen a symbol of the bond between Taiwan and mainland China.
Registered for less than three years, together with a complicated shareholding structure, this would usually disqualify Foxconn Industrial Internet as a listing candidate.
Nonetheless, for political reason, an exemption is very likely to be granted by the authority, namely the State Council.
Listing documents show an application for exemption has already been submitted.
The strong business appeal of Foxconn Industrial Internet is another reason why the IPO approval is almost given.
The company has a lucrative franchise and accounts for about half of Hon Hai group profit. New projects planned cover high-tech areas such as 5G, smart manufacturing and IoT, all seen as strategic new economy building blocks.
The reason why China’s securities watchdog is tightening scrutiny of listing applicants is to boost the overall quality of listed firms. The last thing it wants to do is turn away a tech giant which is highly profitable and creates hundreds of thousands of jobs for the country.
It’s estimated that the company would have a market capitalization of over 550 billion yuan, representing a price-to-earnings multiple of above 35, exceeding the average valuation level of 22 times PE of the sector.
This article appeared in the Hong Kong Economic Journal on Feb 23
Translation by Julie Zhu
[Chinese version 中文版]
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