The China Securities Regulatory Commission (CSRC) disclosed the initial public offering prospectus of the world largest contract electronics manufacturer Foxconn on February 9. The IPO application is pending with the CSRC for approval. It is expected that Foxconn’s Shanghai IPO will be another milestone for the internationalization of Chinese equity market. It will also make Foxconn the largest technology company in A-share market.
Here The Asset highlights the five things you need to know about Foxconn’s IPO and how it will affect the market:
Who is the actual issuer?
Based in Shenzhen, Foxconn Industrial Internet Co (富士康工业互联网股份有限公司), the subsidiary of Hon Hai Precision Industry is the issuer of the IPO, solely sponsored by CICC.
Noticeably, Foxconn changed the company name from “Foxconn” to “Foxconn Industrial Internet” in its IPO prospectus, suggesting its future ambition to change the market’s perception towards the company as a “factory company”. According to the 467-page prospectus, the proceeds will be used automated manufacturing, construction of an industrial internet platform, telecommunication network and cloud service.
As China plays a leading role in the global internet industry, Foxconn is looking to leverage local talents and resources in mainland China. With Foxconn’s strategic reposition from a traditional capital intensive manufacturer to a technology focused company, Foxconn is likely to fund and expand its China operations through the Shanghai IPO.
In an interview with Chinese media in early 2017, Terry Guo, the founder of Foxconn said that it will continue to commit itself to mainland China and recruit over 12 thousand mainland undergraduate talents.
The higher valuation of China’s A-share market is also an advantage of Shanghai as opposed to Hong Kong and Taiwan. As of February 2, the average PE of Shanghai Composite Index is 16.81 while the PE of Hang Seng Index and Taiwan are 13.9 and 15.66 respectively.
Moreover, technology companies are able to achieve an even higher PE in China’s A-share market. In late 2017, Chinese anti-virus software company Qihoo 360 completed its backdoor listing in A-share, with a PE ratio over 100.
In 2017, Foxconn’s sister company, FIT Hon Teng completed its $394 million IPO in Hong Kong.
How big is Foxconn’s business in China?
According to the prospectus, the revenue and the net profit of Foxconn in China has been steadily growing over the past three years. In 2017, With 31 mainland China subsidiaries, Foxconn achieved a revenue of 354.5 billion yuan and net profit of 15.87 billion yuan.
Will CSRC approve the IPO?
Taiwanese companies can generally get easy approval from China Securities Regulatory Commission (CSRC). Over the past two years, more than 20 Taiwanese companies have been listed in China’s A-Share market. However, there are still issues needed to be addressed in Foxconn’s IPO. In an official feedback of CSRC, 69 questions are raised regarding Foxconn’s IPO, including shareholding structure and profitability.
According to the prospectus, the issuer has been operating only less than three years, which is not qualified under CSRC’s mainboard requirement. However, given Foxconn’s commitment to mainland China and the fact that it is a Taiwanese company, Chinese analysts believed that CSRC will give a special green light to Foxconn.
What will be the potential effect?
With US president Trump’s tax cut plan, Foxconn announced in 2017 to invest $10 billion to set up factories in US. Market analysts foresaw Foxconn’s potential migration of its business out of mainland China.
However, the A-share IPO of Foxconn indicated that its major business will still be likely to stay in mainland China and that the future of the largest electronic devices producers is still much tied with mainland China.
To Taiwanese large corporates, the IPO is also blueprint deal which hints Taiwan’s tighter business relationship with mainland China, despite Taiwanese government’s push for Taiwanese corporates to move to Southeast Asian countries.
On the other hand, Foxconn’s IPO marks a milestone of A-share’s internationalization progress. As MSCI will include A-share into its emerging market index, Foxconn can also be a potential candidate to be included in the MSCI’s major index
“It is clear that Chinese authorities have achieve great progress in attracting good companies to China’s A-share market.” comments Guoping Wu in a note, chairman of Yurong Investment.