Micro-credit IPO ‘has its benefits’

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Despite being unpopular with authorities, there are advantages to listings of micro-credit companies, said a lawyer who worked on Quanzhou Huixin Micro-credit’s IPO on the main board of the Hong Kong Stock Exchange (HKEx), only the second such listing.

“Micro-credit companies are neither the mainstream for listing in Hong Kong nor welcomed by HKEx and the Securities and Futures Commission,” Allen Shyu, a Beijing-based partner at Troutman Sanders and a lead partner in the listing, told China Business Law Journal.

micro-credit-ipo-has-its-benefits“In fact, micro-credit companies are relatively popular among investors, as their business model is quite simple – that is, making profit by loans,” said Shyu.

At present, only two micro-credit companies have listed in Hong Kong, namely Zuoli Kechuang Micro-finance and Huixin Micro-credit. Huixin globally offered 180 million H-shares in the IPO, which is expected to raise between HK$279 million (US$36 million) and HK$315 million.

“One unique feature of micro-credit companies is the limitation of their geographical coverage, so risks for such companies are not as high as people may think,” said Shyu.

“Within a certain region, every company and individual is familiar with each other – for example, Huixin is located in Quanzhou city and Zuoli in Deqing county – therefore micro-credit companies have some ability to control the risk when offering loans.”

Shyu said risks such as bad debt were common in the finance industry, but that the bad debt rates of Zuoli and Huixin were actually very low. “Besides, according to China’s law, the upper limit for micro-credit companies’ annual loan interest is 24%, by which investors can still achieve a respectable income.”

In order to expand their business, micro-credit companies must have enough capital available for lending, and that capital comes mainly from shareholders and financial institutions. If listed in Hong Kong, micro-credit companies can raise more capital through public offerings.

Shyu points to research by the firm finding that through IPOs micro-credit companies can not only obtain funds but also broaden the channels of capital markets. When necessary, micro-credit companies can also conduct multiple rounds of financing.

Compared with bank financing, the cost of financing by issuing shares or bonds is lower. Therefore, with an expanding capital base, micro-credit companies can offer sufficient loans to attract more clients while providing itself with more stable income and cash flow.

Huixin Micro-credit, the largest licensed micro-credit company in Fujian province, is primarily dedicated to providing local entrepreneurial individuals, small and medium-sized enterprises, and micro-enterprises, with practical and flexible short-term financing solutions, accounting for about 7.2% of Quanzhou City’s micro-finance market.

Legal counsel: Troutman Sanders advised Huixin, with its team led by Allen Shyu and Hong Kong partner Rossana Chu.