Alpha-Centric ESG Research

Kyle Rudden

Whether we call this a SPAC bubble that has burst or a SPAC bull-run "correcting" itself, one thing is clear – the global SPAC market is cooling off. Cooling off... but not dead. SPACs are likely to play a much larger role in global equity markets than they have historically, and Asia is poised to play a larger role within that larger global equity markets role. We are already seeing evidence of this.Specifically, the recent increase in SPAC-related interest and activity in Asia by: 1) SPAC sponsors (growing number of Asia-based sponsors and foreign SPACs seeking Asia-based targets), 2) Asia's unicorns (several have announced huge SPAC deals), and 3) Asia's financial exchanges (which are increasingly enabling local SPAC listings, such as Singapore Exchange's new framework).It is still too soon to call anything an Asia SPAC "boom," but the growth is tangible and immediate enough for optimism. It motivated me to finally write about a topic I have been meaning to cover – i.e., ESG issues related to the SPAC vehicle itself, as well as to how SPACs are applied in supporting sustainability-related tech startups (e.g., electric vehicles, batteries/storage, clean energy).

Whether we call this a SPAC bubble that has burst or a SPAC bull-run "correcting" itself, one thing is clear – the global SPAC market is cooling off. Cooling off... but not dead. SPACs are likely to play a much larger role in global equity markets than they have historically, and Asia is poised to play a larger role within that larger global equity markets role. We are already seeing evidence of this.Specifically, the recent increase in SPAC-related interest and activity in Asia by: 1) SPAC sponsors (growing number of Asia-based sponsors and foreign SPACs seeking Asia-based targets), 2) Asia's unicorns (several have announced huge SPAC deals), and 3) Asia's financial exchanges (which are increasingly enabling local SPAC listings, such as Singapore Exchange's new framework).It is still too soon to call anything an Asia SPAC "boom," but the growth is tangible and immediate enough for optimism. It motivated me to finally write about a topic I have been meaning to cover – i.e., ESG issues related to the SPAC vehicle itself, as well as to how SPACs are applied in supporting sustainability-related tech startups (e.g., electric vehicles, batteries/storage, clean energy).

SPACs and ESG: Issues Related to the SPAC Vehicle Itself and Sustainability Use Cases

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*New Product Line: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] has published a consultation paper seeking feedback on offering Special Purpose Acquisition Companies (SPAC) by October 31, 2021; and    *Not A Panacea: We do not believe that SPACs are the panacea which will resolve HKEX’s weakened revenue stream. Further, the US Securities and Exchange Commission (SEC) issued accounting guidance for SPACs, calling warrant issuance by SPACs liabilities rather than equity instruments. This could disrupt new SPAC filings, and certainly throw a wrench into HKEX’s SPAC plans.

*New Product Line: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] has published a consultation paper seeking feedback on offering Special Purpose Acquisition Companies (SPAC) by October 31, 2021; and    *Not A Panacea: We do not believe that SPACs are the panacea which will resolve HKEX’s weakened revenue stream. Further, the US Securities and Exchange Commission (SEC) issued accounting guidance for SPACs, calling warrant issuance by SPACs liabilities rather than equity instruments. This could disrupt new SPAC filings, and certainly throw a wrench into HKEX’s SPAC plans.

Hong Kong Exchanges & Clearing – SPAC Time

*Creation of New Beijing Exchange: The establishment of a new Beijing Exchange will support small-to-medium sized enterprises (SME) exchange listings. The Beijing Exchange will only manage the highest-quality SMEs, with investment being made very accessible to small retail investors (minimum CNY 1 mn in liquid assets) – virtually ensuring success of the new Beijing Exchange; and
*HKEx Continues To Be Hollowed Out: Coupled with mainland China’s establishment of a new stock exchange to attract overseas-listed firms, mainland China continues to reinforce the notion that Shanghai will become the pre-eminent global financial center in Asia - limiting Hong Kong Exchanges &amp; Clearing’s (388.HK) [HKEx] ability to attract up and coming mainland Chinese IPOs over longer-term. In other words, if HKEx's mainland China story goes away so should HKEX’s exorbitant valuation.

*Creation of New Beijing Exchange: The establishment of a new Beijing Exchange will support small-to-medium sized enterprises (SME) exchange listings. The Beijing Exchange will only manage the highest-quality SMEs, with investment being made very accessible to small retail investors (minimum CNY 1 mn in liquid assets) – virtually ensuring success of the new Beijing Exchange; and
*HKEx Continues To Be Hollowed Out: Coupled with mainland China’s establishment of a new stock exchange to attract overseas-listed firms, mainland China continues to reinforce the notion that Shanghai will become the pre-eminent global financial center in Asia - limiting Hong Kong Exchanges &amp; Clearing’s (388.HK) [HKEx] ability to attract up and coming mainland Chinese IPOs over longer-term. In other words, if HKEx's mainland China story goes away so should HKEX’s exorbitant valuation.

Hong Kong Exchanges & Clearing – China Plays Long Game With HKEx

*Challenging Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 2Q21 weak earnings of HKD 2.8 bn, declining HKD 1.1 bn (27.9%) linked quarter. Results were even worse when we exclude investment income (declined HKD 73 mn or 15.7% linked quarter) – decreasing HKD 997 mn (29.5%) to HKD 2.4 bn. Results were highlighted by HKEX’ marginally negative operating jaws, as recurring revenue declined HKD 1.9 bn (29.7%) while operating expenses increased HKD 8 mn (0.7%) over the period. HKEX’ 2Q21 witnessed weak revenues almost across the board; and*Risks Are Increasing: In addition to an extended valuation when ADT has begun to turn and having a new CEO with no exchange experiences, HKEX needs to contend with the government’s examination of a stamp duty increase, mainland China’s contemplation of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center; and the Sino-ification of HKEX trading as tension mount between the US and mainland China.

*Challenging Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 2Q21 weak earnings of HKD 2.8 bn, declining HKD 1.1 bn (27.9%) linked quarter. Results were even worse when we exclude investment income (declined HKD 73 mn or 15.7% linked quarter) – decreasing HKD 997 mn (29.5%) to HKD 2.4 bn. Results were highlighted by HKEX’ marginally negative operating jaws, as recurring revenue declined HKD 1.9 bn (29.7%) while operating expenses increased HKD 8 mn (0.7%) over the period. HKEX’ 2Q21 witnessed weak revenues almost across the board; and*Risks Are Increasing: In addition to an extended valuation when ADT has begun to turn and having a new CEO with no exchange experiences, HKEX needs to contend with the government’s examination of a stamp duty increase, mainland China’s contemplation of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center; and the Sino-ification of HKEX trading as tension mount between the US and mainland China.

Hong Kong Exchanges & Clearing – Glitter Is Gone

*Poor Result: Singapore Exchange (SGX.SP) [SGX] reported a weak FY 2H21 result, declining SGD 35.0 mn (14.6%) on an HOH basis. Higher than expected costs was the primary culprit for the overall disappointing result, increasing SGD 28.7 mn (11.6%) HOH pushing the expense to revenue ratio 410 bp higher to 51.8%. Cost pressures will not end, as SGX gave guidance that costs are due to increase between 9%-11%, as revenue begins to contract; and*Peripatetic: Recently, SGX announced its acquisition of MaxxTrader, its third acquisition after BidFX and Scientific Beta in 2020. Management is also considering getting involved Special Purpose Acquisition Companies (SPACs). Significant strategic alternatives are needed at SGX, if it is to avoid being hollowed out by the Hong Kong Exchanges &amp; Clearing (388.HK).

*Poor Result: Singapore Exchange (SGX.SP) [SGX] reported a weak FY 2H21 result, declining SGD 35.0 mn (14.6%) on an HOH basis. Higher than expected costs was the primary culprit for the overall disappointing result, increasing SGD 28.7 mn (11.6%) HOH pushing the expense to revenue ratio 410 bp higher to 51.8%. Cost pressures will not end, as SGX gave guidance that costs are due to increase between 9%-11%, as revenue begins to contract; and*Peripatetic: Recently, SGX announced its acquisition of MaxxTrader, its third acquisition after BidFX and Scientific Beta in 2020. Management is also considering getting involved Special Purpose Acquisition Companies (SPACs). Significant strategic alternatives are needed at SGX, if it is to avoid being hollowed out by the Hong Kong Exchanges &amp; Clearing (388.HK).

Singapore Exchange – Completely Distracted

Japan

Japan Exchange Group Inc is the holding company created through the merger of Tokyo Stock Exchange Group, Inc and Osaka Securities Exchange Co., Ltd. The group provides and operates a marketplace for the trading of equities, futures, and options. The Group manages the trading, as well as administers listed stocks and registered members.

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Japan Exchange Group (8697 JP)

Hong Kong Exchanges & Clearing – SPAC Time

HKEX: HKEX is seeking feedback on offering SPACs. We do not believe that SPACs are the panacea which will resolve HKEX’s weakened revenue stream.

Thomas J. Monaco

Hong Kong Exchanges & Clearing – China Plays Long Game With HKEx

HKEX: The establishment of a new Beijing Exchange will support SME exchange listings. Coupled with establishment of a new exchange, HKEx continues...

Thomas J. Monaco

Hong Kong Exchanges & Clearing – Glitter Is Gone

HONG KONG EXCHANGES: HKEX reported 2Q21 weak earnings, declining 27.9%. Results were highlighted by HKEX’ marginally negative operating jaws. HKEX’...

Thomas J. Monaco

Singapore Exchange – Completely Distracted

SINGAPORE EXCHANGE: SGX FY 2H21 result declined 14.6% HOH due to rising costs. This is a distracted company with three bolt-ons in last year....

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

SPACs and ESG: Issues Related to the SPAC Vehicle Itself and Sustainability Use Cases

In Asia there is an undeniable upswell in SPAC activity – by SPAC sponsors, crown-jewel unicorns, and bourses like SGX. This covers ESG issues...

Kyle Rudden

Hong Kong Exchanges & Clearing – SPAC Time

HKEX: HKEX is seeking feedback on offering SPACs. We do not believe that SPACs are the panacea which will resolve HKEX’s weakened revenue stream.

Thomas J. Monaco

Hong Kong Exchanges & Clearing – China Plays Long Game With HKEx

HKEX: The establishment of a new Beijing Exchange will support SME exchange listings. Coupled with establishment of a new exchange, HKEx continues...

Thomas J. Monaco

Hong Kong Exchanges & Clearing – Glitter Is Gone

HONG KONG EXCHANGES: HKEX reported 2Q21 weak earnings, declining 27.9%. Results were highlighted by HKEX’ marginally negative operating jaws. HKEX’...

Thomas J. Monaco

Singapore Exchange – Completely Distracted

SINGAPORE EXCHANGE: SGX FY 2H21 result declined 14.6% HOH due to rising costs. This is a distracted company with three bolt-ons in last year....

Thomas J. Monaco