H Shares Fully Tradable, Basecare Medical Enters High-Growth Trajectory
Beikang Medical has recently been abuzz with good news.
Following the surge in stock prices triggered by Beijing’s announcement that 16 assisted reproductive technology (ART) procedures would be covered by medical insurance, Beikang Medical received formal approval from the China Securities Regulatory Commission (CSRC) on February 24, 2022, to implement its H-share full circulation plan, thereby achieving a full-fledged public listing. As the leading ART company listed on the Hong Kong Stock Exchange (HKEX), Beikang Medical stated that up to 193 million of its unlisted shares could be converted into H-shares and traded on the HKEX within the 12-month period starting from January 24. This means that the total number of H-shares listed and tradable on the Stock Exchange will not exceed 274 million, equivalent to 100% of its total issued shares.
On the day of the announcement, Beikang Biotech’s stock price saw a slight increase. So, what is full circulation of H-shares? And what impact will it have on corporate development?
Full Circulation of H-Shares: The full term refers to the authorization for previously non-tradable shares of H-share companies to be traded on overseas markets. This is a concept unique to the Hong Kong stock market.
It is important to note that the concept of “full circulation of H-shares” presupposes that not all publicly listed Hong Kong stocks are freely tradable. On the Hong Kong Stock Exchange (HKEX), companies incorporated outside Hong Kong may choose between two listing pathways: “H-share listing” and “red-chip listing.” An H-share listing refers to a structure where the issuer is incorporated in mainland China and lists directly using its domestic operating entity as the listed vehicle. In contrast, a red-chip listing involves injecting the domestic operating assets into an offshore-incorporated holding company, which then serves as the listed entity.
If a company chooses to list as an H-share, its shares will be divided into two categories: domestic shares held by pre-IPO shareholders and foreign shares issued to overseas investors during the IPO. The former cannot be freely traded on the Hong Kong Stock Exchange and may only be transferred among Chinese legal persons or natural persons, qualified foreign institutional investors, or strategic investors, constituting a non-full circulation structure. However, given that Red Chip listings involve more complex preparatory work and entail greater regulatory risks, H-share listing has remained the preferred choice for most companies seeking to list in Hong Kong. Nevertheless, the restrictions on stock trading, which prevent full market liberalization, undoubtedly hinder further improvements in the liquidity of these companies’ shares.
Consequently, in late 2017, the China Securities Regulatory Commission (CSRC) launched a pilot program for “full circulation.” Two years later, in November 2019, it officially announced the comprehensive rollout of the H-share “full circulation” reform, ushering the Hong Kong Stock Exchange into the era of full circulation. Subsequent practice has shown that, in addition to listed companies meeting the eligibility criteria actively adopting full circulation, many pre-IPO companies have also opted for the full circulation listing model during their preparation stages.
For specific companies listed on the Hong Kong Stock Exchange, achieving full circulation of shares not only leads to short-term stock price fluctuations but, more importantly, strengthens long-term operational management, marking a new journey filled with greater possibilities.
First, let us examine the stock price. As previously mentioned, lifting restrictions on trading of domestic shares will significantly enhance capital liquidity on the Hong Kong Stock Exchange (HKEX). Data shows that at the launch of the “full circulation” pilot program for H-shares, approximately 160 H-share companies met the eligibility criteria, with a market value of shares available for full circulation amounting to HK$1.64 trillion. This represented 67% of the total market capitalization of these roughly 160 H-share companies and accounted for 5.1% of the HKEX’s total market capitalization of HK$31.9 trillion. The expanded proportion of tradable shares has not only greatly enhanced corporate participation in the HKEX market but also increased trading volume and liquidity, thereby boosting the exchange’s attractiveness and drawing more companies to list on the HKEX, creating a positive feedback loop.
Examining the impact of full share circulation on a company’s long-term management and operations, this is mainly reflected in two aspects: optimization of further financing capabilities and greater alignment between management and corporate objectives.
First, listed companies will receive greater support from the capital markets.On one hand, more intensive trading in the capital market, which drives up stock prices, also achieves an optimization and upgrading of the shareholder structure of listed companies. This allows more investors with greater strength to enter the equity structure, laying a foundation for the company’s subsequent stable development.
On the other hand, with the implementation of full circulation, the Stock Connect program will be opened to companies with lower market capitalizations. This is likely a key reason why Beikang Medical has been actively preparing for the full circulation of its H-shares. According to regulations, for a company listed on the Hong Kong Stock Exchange to be included in the Stock Connect and gain access to additional mainland capital, its market capitalization must be no less than HK$5 billion. For companies listed via H-shares, this market capitalization calculation includes only the tradable (circulating) market value, which significantly raises the entry threshold. However, upon completion of the H-share full circulation, listed companies whose tradable market capitalization is below HK$5 billion but whose total market capitalization exceeds HK$5 billion will also become eligible for inclusion in the Stock Connect. This expands financing channels for these companies, facilitating new business expansion or larger-scale industrial mergers and acquisitions, thereby accelerating corporate growth onto a new fast track.
In fact, as early as August 2021, there were reports that Beikang Medical was preparing to implement the full circulation of its shares. At that time, the market expressed great anticipation for Beikang Medical’s agile use of capital market M&A strategies to supplement and optimize its asset base in a short period, thereby accelerating the company’s goal of building a closed-loop ecosystem in reproductive genetics.
Second, implement equal rights and benefits for shareholders holding the same class of shares to optimize the corporate governance efficiency of listed companies.After a company goes public, the founding team typically holds the majority of shares and retains decision-making authority. The outcomes of their management and operations determine the extent to which minority shareholders, who enter the company’s ownership structure through capital markets, can realize investment returns. For H-share companies, major shareholders usually hold non-tradable domestic shares, while minority shareholders hold foreign-invested shares.
Major shareholders strive to operate their companies to drive growth, yet they are unable to realize gains through capital market exits to share in the rewards. This disconnect between input and output inherently limits the incentive to further improve governance efficiency, which not only suppresses company valuations but also, to some extent, undermines the interests of minority shareholders. As major shareholders’ shares become tradable, their operational achievements can be quickly monetized, naturally providing stronger endogenous motivation to optimize management and amplify corporate value.
This logic also applies to employee incentives in listed companies. Previously, constrained by the issue of full circulation of H-shares, H-share companies were long unable to directly and effectively implement employee stock ownership plans. With the full circulation of H-shares, the more direct wealth effect will undoubtedly better incentivize employees and improve corporate governance efficiency for company management.
For Beikang Medical, achieving full circulation of its H-shares marks a significant milestone and a new beginning. We await to see how it will strengthen its endogenous momentum for sustained growth amid an increasingly optimized external environment.