Former Hong Kong stock market boss helping Macau connect global investors to mainland China's SMEs

Zhou Yingqun, a 28-year-old native of Hunan who has spent more than ten years working in the beauty salon industry, never imagined that one day he would be ringing an IPO bell.

But the modest young guy claimed he was over the moon when Mr Judy, the hair treatment business he works for as a regional manager, announced a brand-new sort of security in Macau earlier this year.

"I was very, very excited. I just felt very honoured and excited to be able to participate in such a significant ceremony," Zhou remarked.

Zhou, who started working for Mr. Judy in 2020 as a general employee, was given the chance to help the business open a new store and acquire 10% of the stock last year. The lack of collateral made it nearly impossible for Zhou to obtain bank loans, so he borrowed the remaining funds via Micro Connect, an investment platform co-founded by Charles Li Xiaojia, the former head of Hong Kong's stock market operator.

Mr. Judy recently joined the approximately 4,000 enterprises in the first batch to list daily revenue obligations (DROs), a new financial product, on the Micro Connect Macao Financial Assets Exchange (MCEX).

MCEX, which opened at the end of March in the former Portuguese colony, is the first authorized global exchange for DROs, which can be exchanged by institutional investors whose money are given to small enterprises in China, mostly shops and small retail establishments in exchange for a portion of their daily income.

By offering investment options to the nation's small firms, Micro Connect's objective is to close the funding gap between foreign investors and mainland China's grassroots economy.

Additionally, it hopes to support the growth of Macau's financial sector as the city works to shift its emphasis away from the gaming sector and toward entertainment and innovation.

Samson Cheng, head of corporate development at Micro Connect, said: "Through MCEX, Macau can play a role in introducing overseas capital for China's small and micro-sized economy, which aligns with its goal to develop a finance sector with its own characteristics."

Analysts say Macau wants to establish itself as a different location promoting financial innovations that might not be permitted elsewhere. Macau is already surrounded by financial powerhouses like Singapore, Shanghai in eastern China, Hong Kong and Shenzhen in the Greater Bay Area, and Hong Kong and Shenzhen in the Greater Bay Area.

"Macau is trying to have its own path [to develop the financial sector] in a way that’s not directly competing with existing financial centres such as Hong Kong as they are already mature in various services and infrastructures," said Adrian Cheung, dean of the faculty of finance at the City University of Macau.

Through the MCEX program, small and micro businesses—defined as those with less than ten employees—can acquire money through a listing akin to an initial public offering (IPO) without giving up ownership or management of their organizations. Additionally, it provides institutional investors with access to a different type of investment vehicle that enables them to generate a daily stream of instant cash income.

According to Micro Connect, there are more than 70 million small and micro enterprises in China, and their annual financial needs are expected to be between 12 trillion yuan (US$1.71 trillion) and 13 trillion yuan.

Ho Iat-seng, the territory's chief executive, stated at this month's Beyond Expo tech conference that Macau is "well positioned to be an innovation hub given its international free port, its politically neutral stance [and its] preferential business and foreign-trade environment."

Small and medium-sized enterprises (SMEs) in China consistently have trouble getting access to capital. The issue still exists for many despite repeated calls from the government for banks to provide credit for SMEs.

Hanyangguan, a chain of Korean BBQ restaurants, has looked into many avenues for obtaining financing over the past three years, including venture capital and private equity, but the procedures involved were drawn out. Bank loans, on the other hand, had strict repayment terms, which had a significant impact on small enterprises during the three years of Covid-19.

"Our Shanghai branch was shut down for three months during the lockdown last year, so there was zero revenue," according to Duan. "If we had borrowed from a bank, they wouldn’t care if we made money or not. We would have to repay the loan on time regardless. But with Micro Connect … we both have more flexibility in that sense."

Micro Connect is able to sell its interest in a company through its new exchange. Contracts between Micro Connect and small businesses known as "DRCs" are exchanged for tradeable financial instruments known as "DROs," which investors can freely buy and sell on the exchange.

Small businesses can issue more DROs to use the exchange to raise more money.

DROs do not provide free access to funding. Micro Connect estimates that the annual finance cost is between 12 and 13 percent, however small firms gain from Micro Connect sharing their revenue risks.

This summer, Micro Connect plans to introduce the next two stages of the DRO market. A secondary trading mechanism will enable something similar to the secondary trading of equities on any exchange, while an add-on offering will allow small enterprises to issue extra DRO shares to investors in order to raise more money.

The company intends to permit the 70 to 80 institutional investors in the pipeline to participate in the market and begin buying and selling DROs. These investors are mostly asset managers, securities companies, banks, and regulated family offices.

Next year, Micro Connect plans to triple the number of companies listed through the DRO scheme to 100,000 and raise between 9 and 15 billion yuan through the MCEX.

In the future, the company wants to expand the platform's reach beyond China and into places like Southeast Asia in order to gradually establish it as a standard source of financing for small businesses, according to Cheng.

By fLEXI tEAM