The recent decision by the Hong Kong Stock Exchange (HKSE) to recognise Israel as an ‘Acceptable Overseas Jurisdiction’ means that companies incorporated in Israel are now eligible for listing on the stock exchange in Hong Kong. This is a significant development on several levels. Simon Weintraub and Daniel Green, partners at Yigal Arnon & Co. and co-heads of the firm’s dynamic China Practice explain.
Given the HKSE’s reputation for high standards of regulation, investor protection and corporate governance, we see this decision as further international recognition of Israel’s highly developed corporate legal framework. In this sense, the relevant regulatory bodies in Hong Kong are comfortable with an Israeli entity being publicly traded in Hong Kong. Second, the decision is yet another indication of the deepening economic relations between China and Israel – a development that is already making a profound impact in the Israeli market. And third, HKSE decision represents a potentially significant opportunity for Israeli companies considering an overseas IPO, especially those with an Asia focus.
In connection with the approval, the HKSE published an Israel Country Guide. While largely technical in nature, it is important to note that the HKSE’s approval is currently restricted to Israeli public companies listed outside Israel and to Israeli private companies. In this sense, the approval does not apply to Israeli companies which are publicly traded on the Tel Aviv Stock Exchange.
The HKSE decision needs to be understood in the context of the rapidly expanding commercial relations between Israel and the PRC. Current bilateral annual trade between the countries is approximately $11bn and China is now Israel’s third largest trading partner globally. This is occurring at a time when China, as a matter of policy, is investing heavily in overseas assets with a focus on innovation and technology. In Israel, the high-tech driven economy has shown rapid growth in recent years and a record $4.8bn was raised in 2016 by companies in the high-tech sector. Chinese investors represented a large percentage of that figure. However, according to reports approximately $8.8bn in exit proceeds were generated in 2016, a figure that included 93 M&A transactions but only three IPO’s. While Israel is known to have more publicly listed companies on NASDAQ and the NYSE than any other jurisdiction aside from the US and China, there has been a significant decrease in these public offerings in recent years and very few Israeli companies are scaled today to become public companies. Rather, most Israeli companies tend to see their exit as a sale to a global acquirer at an earlier stage. The recent acquisition of MobileEye by Intel for approximately $15bn is probably an exception to this general rule as MobileEye was publicly traded on the NYSE.
Regarding China, it is worth noting that the authorities recently imposed strict new rules regarding capital outflow. These restrictions were established to balance the tremendous amount of capital outflow from China compared to inflow, and to address the depreciation of the RMB. For example, it was reported that $750bn of capital was invested outside China in the first ten months of 2016 alone. It is our understanding that China’s main concern relates to investments in non-strategic sectors. Although the restrictions will apply to all sectors, the general policies designed to foster innovation have not been abandoned. For this reason, we believe that investments into Israeli technology companies are seen as important to China and that the authorities did not intend to limit investment in these sectors. In fact, it was reported during the recent trip of Israeli Prime Minister Netanyahu to China this past March that he asked his Chinese hosts to consider granting Israel a waiver or an exemption to such restrictions.
Notwithstanding the concerns relating to such currency restrictions, Chinese foreign investment has continued in 2017 – both into Israel and in general. In Israel, Chinese interest in the medical technology sector continues apace, as evidenced, for example, by the recent $50m investment by Beijing based BOE Technology Group into Cnoga Medical Ltd. In general, large Chinese companies have also continued acquiring foreign assets and have raised capital outside of China through foreign subsidiaries which are not subject to these restrictions. We believe that the recent addition of Israel as a recognised overseas jurisdiction by the HKSE and especially at this moment in time is not a coincidence; rather it is consistent with Chinese policy to obtain access to global innovation and technology.
We see the confluence of these developments as a very good opportunity for mature Israeli technology companies, particularly but not exclusively in the med-tech sector, which already have sales in Asia and are looking to significantly ramp up their Asian activities, especially in China. By way of example, it was announced on June 6th that Sisram Medical Ltd, an Israeli company indirectly controlled by Fosun International and the sole shareholder of Alma Lasers (a global developer and manufacturer of cosmetic laser solutions and medical laser treatments headquartered in Israel), filed an A-1 application to the HKSE – the first application to list on the exchange by an Israeli company. While there is no certainty that the IPO will close, there is no doubt that the very filing of the application is a significant milestone.
In conclusion, the HKSE’s approval of Israel as an ‘Acceptable Overseas Jurisdiction’ is a win-win situation for China and Israel, as China is seeking ways to invest in innovative technologies at a time of regulatory uncertainty and Israeli companies are seeking access to capital and new markets. We are optimistic about the future possibilities and look forward to subsequent listings of Israeli companies in Hong Kong.
This article was published in FTSE Global Markets, the online version can be found here.