Deloitte China's Edward Au on Hong Kong's vibrant IPO scene

The managing partner and IPO veteran is one of the judges in the 2020 Hong Kong Business Awards.

Edward Au, managing partner of the southern region at Deloitte China, is responsible for Deloitte China's offices across Southern China, encompassing Hong Kong, Changsha, Guangzhou, Hainan, Macau, Shenzhen and Xiamen. He drives practice transformation, fosters talent development, and advances the firm’s presence across the region.

Edward has been an Audit partner of Deloitte China since 2003, gaining extensive experience in auditing multinational corporations, public companies and enterprises in Hong Kong, Singapore, the United States (US), and the Chinese Mainland.

Edward also contributes to the community in Hong Kong by serving on professional bodies, including the Hong Kong Institute of Certified Public Accountants (HKICPA), Hong Kong Red Cross, and the Construction Industry Council of Hong Kong.

In his role as one of the judges of the Hong Kong Business Awards 2020, HKB chatted with Edward as he shared his observations on Hong Kong’s IPO scene amidst the pandemic and the emergence of Wealth Management Connect in the Greater Bay Area.

Can you share with us your work experience or any backstory that has contributed to your professional career?

I started my career at Deloitte China following graduation from university, where I majored in accounting. After working with the firm for about 10 years, I was admitted to the partnership. Most of my career has focused on auditing, especially assisting companies to go public in Hong Kong and the US.

The companies I have audited include multinationals, local firms, and public enterprises in Hong Kong, Singapore, the US, and the Chinese Mainland. I have dedicated most of my career to auditing and initial public offering (IPO) work because it is challenging and has given me many opportunities to work with clients from different sectors, and other professional intermediaries, including investment bankers and corporate finance lawyers, as part of a team.

Other than working with finance teams, I need to be in touch with personnel from all levels and departments, from warehouse keepers all the way up to boards of directors, to gain an understanding of client's business operations, strategies, risks, internal controls and inventory management.

I have had opportunities to travel to cities, countries and regions where my clients are based. I often need to race against time to meet reporting deadlines for clients. This is particularly important when helping clients to go public in Hong Kong.

This April, my responsibilities have expanded beyond audit and IPO services to all other service lines of the firm in Southern China, with a focus on practice transformation, talent development and driving the firm’s presence across the region, in particular Southern China.

What are your observations on Hong Kong's IPO scene? Tell us about recent trends and where the opportunities are.

Hong Kong's IPO market has remained resilient and vibrant amid the pandemic. Although it had a slow start in Q1, it started to gain momentum in Q2 following the completion of two secondary listings by US-listed Chinese tech giants.

In 1H 2020, approximately three-fifths of funds raised in the Hong Kong IPO market were driven by the new economy sector, including biotech and technology companies.

In Q3, we will have seen five sizable deals from the manufacturing, financial services, biotech and consumer/retail sectors, even as the pandemic lingered. This sent Hong Kong's IPO proceeds to HK$149.3 billion by the end of August, up 76% year-on-year from the HK$84.9 billion raised in the first eight months of 2019.

Weighted-voting rights and secondary listed companies have been eligible for inclusion in Hang Seng Indices since this August. This will help the secondary listings of Chinese concept stocks in Hong Kong. On this basis, we expect about 10 US-listed Chinese companies to have secondary listings in Hong Kong over the last four months of the year.

Which sectors have been performing well despite the current crisis? How have these contributed to Hong Kong's performance?

Pharmaceuticals, biotech and tech IPOs have been market highlights, and we expect them to remain so. These sectors have continued to thrive and grow stronger during the pandemic. Technology businesses are driven by rising demand and the need to shift many offline activities to online, including business transactions and consumer purchases, as a result of lockdowns and restricted personal and business activities due to the pandemic.

The Hang Seng Tech Index, which was launched in late July, is already the third most popular index after the benchmark Hang Seng Index and the Hang Seng China Enterprises Index. Many issuers of exchange traded funds are trying to introduce new products tracking this index. This has enriched the ecosystem and outlook for tech company listings in Hong Kong.

Another three to four IPOs, each raising about HK$7.8 billion, are expected in Hong Kong over the last four months of the year.

As capital market reform in the Chinese Mainland deepens and various enhancements are introduced, including the launch of the registration-based regime for ChiNext, and recently refined listing rules for red-chip companies from innovation sectors, we expect a cluster of businesses that are dual-listed in the Chinese Mainland and Hong Kong to form. Ongoing uncertainties in the geopolitical environment will also boost this trend.

Hong Kong is one of the largest IPO markets. How was it able to maintain its position on the global IPO leaderboard?

Over the years, Hong Kong has been able to sustain its leadership position as the world's largest IPO market due to its free flow of capital, sound legal system, international investor base and supportive listing regime.

Hong Kong Stock Exchange has worked very hard to enhance the listing regime and infrastructure for the entire capital market and business community. Its efforts extend from making H-share listings available and introducing international companies to list in Hong Kong, to launching stock connect initiatives with the Shanghai and Shenzhen bourses, and most recently Hong Kong's largest-ever listing reform in 2018.

Given its geographical advantage of being close to the Chinese Mainland, Hong Kong is regarded by many businesses, especially overseas ones, as a gateway or stepping stone to enter the Chinese Mainland market. Among Chinese Mainland businesses, Hong Kong has been a preferred listing destination for many years, given its similarities in language and culture, and being in the same time zone while having access to the global business community, particularly international investors.

It has the liquidity and capability to attract issuers of different sizes, sectors and business models, ranging from small-and-medium sized enterprises, conglomerates, multinational companies, Chinese private and state enterprises, to international businesses from the traditional and new economies and different jurisdictions.

Most importantly, upon successful listings, issuers can leverage the high quality and efficiency of the Hong Kong capital market to make follow-on offerings. The funds raised from follow-on offerings often exceed those for IPOs, demonstrating the strong liquidity with which the Hong Kong capital market can support issuers.

For example, although IPO funds raised in the first eight months of 2020 in Hong Kong reached HK$149.3 billion, total funds raised over the period were HK$369.2 billion. This indicates strong demand for follow-on offerings.

The new limited partnership fund regime, which came into effect at the end of August, enhances the competitiveness of Hong Kong in becoming a leading regional asset management and private equity hub, and makes a strong appeal for fund investment and management activities. It is also expected to boost Hong Kong's capital market liquidity.

In the longer run, we believe reform of the full circulation of H-shares and consultations on entities with weighted voting rights beneficiaries and a paperless listing and subscription regime, should help companies continue to list in Hong Kong.

HKMA and other regulators recently implemented Wealth Management Connect in the Greater Bay Area. What roles will this play in Hong Kong’s position as a financial and innovation hub, and how will Hong Kong fare?

The Wealth Management Connect (WMC) initiative is the first Connect scheme that aims to integrate all Greater Bay Area (GBA) cities, and will facilitate more cross-border financial services, transactions and investment within the GBA. Capitalizing on the strong GDP growth of GBA cities, especially Shenzhen and Guangzhou, it supports Mainland retail investors' access to global investment products through Hong Kong banks for asset reallocation, risk management or other investment purposes. It should drive the robust growth of Hong Kong's private wealth management industry and enhance Hong Kong's role as an international asset management centre.

With the huge potential of the GBA cities, corporations and financial institutions can focus on designing more renminbi (RMB) bonds and developing RMB bond-linked products tailored for retail markets. Traditionally, Hong Kong's offshore RMB bonds are particularly attractive to Mainland companies that are seeking RMB financing through Hong Kong, and institutional investors are relatively more active in this market. The WMC could open this segment to more retail investor participation and promote further development of the offshore RMB bond market in Hong Kong.

With the Hong Kong Monetary Authority announcing on 29 June 2000 that cross boundary remittances can be carried out in RMB, with currency converted in offshore markets, cross-boundary fund flows in RMB should increase significantly to support the RMB liquidity pool in Hong Kong, and strengthen Hong Kong as the world's largest offshore RMB business hub. Just as importantly, WMC can lay the foundations for Hong Kong to further develop its integrated financial services market beyond the GBA and towards the rest of the Chinese Mainland, which would empower Hong Kong's mission to facilitate RMB internationalization in the long term.