HK IPO market is down but not out

It raised below half of what it did in 1H15.

Six months into 2016, the Hong Kong IPO market has raised less than half of what it did during the same period last year, but it still did better than it’s global rivals New York and London.

Even as the Hong Kong IPO market showed weakness in the first half of the year with total funds raised dipping by around two-thirds, its rivals like New York and London are bleeding as well, enabling the former to cling on to the top spot of the global rankings. Analysts expect a listing surge in the second half of the year, with the market largely brushing off Brexit, and going into overdrive on the back of mainland Chinese and other Asian firms lining up to raise funds. 

Limping leader

Global economic uncertainty has dampened fundraising through IPOs worldwide, even in Hong Kong, although the territory has not been ousted from its throne. The
volume of IPOs and funds raised in Hong Kong ensured it has continued to rank number one globally in the first half of 2016,” says Eddie Wong, partner of capital markets
services at PwC Hong Kong. In the first half of this year, there were a total of 40 new listings in Hong Kong, a 22% decrease compared to the same period last year. Total funds raised reached HK$43.5 billion, a 66% decline year on year. Eddie Wong attributes the decline to global economic uncertainty as well as volatility in China’s stock market earlier this year, which prompted investors and companies planning to list in Hong Kong to adopt a wait-and-see attitude.

But comparing Hong Kong to the rest of the world, the territory continues to hold a firm a leading position in global capital markets. IPO activities in Hong Kong showed a relatively stellar performance than second-place London Stock Exchange (total funds raised HK$31.6 billion) and third-place New York Stock Exchange (HK$28.8 billion).
Other IPO markets buckled under the pressure of slowing economic growth in China and weak economic recovery globally, plus the added uncertainty from the UK
referendum to exit the EU and the pace of US interest rate hikes.

The Hong Kong IPO market has coped better than others, with a stream of financial services raising most of the proceeds, seemingly unperturbed by the souring macroeconomic environment. IPOs of financial services companies made up 84% of total funds raised on the Main Board. “This reflects the fact that many mainland banks and financial institutions continued to actively pursue optimal timing to list in Hong Kong in order to raise capital and meet future development needs,” says Eddie
Wong.

“Although there were some market fluctuations in Hong Kong in the first quarter, it improved in the second quarter. In the first half of 2016, most IPOs on the Main
Board were financial services companies, followed by retail, consumer goods and services, as well as industrial products,” he adds.

Looking forward to the second half of 2016, there is wide expectation that Hong Kong will pull ahead even more as the IPO market leader, again led by listings by
financial services firms. “We expect listings in Hong Kong for 2016 to continue their focus on financial services, with the chance of seeing a mega-IPO raising over HK$50
billion,” says Eddie Wong.

Second half surge

Edward Au, co-leader of the national public offering group at Deloitte China, shares this optimism, anticipating more buoyancy in IPO activity in Hong Kong especially in the fourth quarter, the traditional peak season for IPO listings. He reckons a large pipeline of IPOs and a favourable listing environment should improve Hong Kong’s hope for IPO leadership position for another year. Au believes Hong Kong still possesses strong advantages for Chinese companies, and foresees that Chinese companies will continue to flow to Hong Kong for fundraising activities in their urge to scale up and go global.

It also helps Hong Kong that there is a large backlog of nearly 800 IPO applicants on the Chinese mainland as well as an ongoing priority of stabilising the A-share market. With tighter IPO approvals being the status quo, this suggests that there is a slimmer chance of introducing the registration-based regime this year, that was anticipated to help bring a more efficient IPO approval process for the Mainland, according to Au.

Another positive development for Hong Kong is the plan of transforming the environmental conservation industry into a Chinese pillar sector, which should encourage more companies in that sector to seek funds in Hong Kong. Au reckons healthcare and pharmaceutical companies will likewise look for IPO opportunities in Hong Kong on the back of the ongoing China medical sector reform.

With Hong Kong providing a more appealing IPO environment, mainland capital markets have been floundering due to stricter listing policies and greater uncertainty, says Benson Wong, assurance partner, PwC Hong Kong. The volume of A-share IPOs and funds raised in mainland markets in the first half of 2016 dropped significantly compared to the same period last year. There were a total of 61 new listings and total funds raised reached RMB28.8 billion, declining 67% and 80% respectively year on year. “These reflect the policy uncertainties in the mainland capital markets which caused volatility in the A-share market during the first half of this year. Coupled with stricter reviewing of listing proposals and terms by regulatory authorities, the rate of IPO launches in mainland markets has been slowing down,” says Benson Wong.

Given the increasingly complementary trading platforms in China and Hong Kong, Chinese companies are expected to remain keen to list in Hong Kong, says Eddie Wong. “In particular, domestic enterprises with developed, mature businesses hoping to reach more overseas investors may list in Hong Kong as red chips or H-shares. Also, due to the considerable listing queue in the mainland, we believe that some of these companies may choose Hong Kong as a listing destination where timelines can be more easily managed. This will sustain the trend for Chinese enterprises listing in Hong Kong,” he adds.

A well-rounded market

Hong Kong is not only popular among Chinese mainland firms, but also across the Asian region as a well-rounded market for IPO fundraising. “The Hong Kong market
continues to be one of the hot listing venues for SMEs in southeast Asia as well, especially those run by overseas Chinese or with a China business strategy,” says Au. “It
is still relatively balanced in terms of market liquidity, valuation and pre- and post-listing fundraising capability. Local small and medium-sized enterprises are still eager
to get listed in Hong Kong which is evident in the surge in listing applications,” he adds.

“With a clearer market outlook providing a more stable listing window, seven to eight listings are likely to commence their offering plans. Most of these firms will require funds to expand cross-border brokerage and securities businesses in order to sharpen their competitiveness.” In light of its very positive standing as an IPO market, Deloitte forecasts Hong Kong to have about 115 IPOs raising approximately HK$200 billion for the full year of 2016.

The Hong Kong IPO market will not suffer significantly in the second half of the year as a result of the Brexit vote, according to Benson Wong. He explains that while the UK’s decision to exit the EU may increase volatility in the global economy and cause investors to become more risk-averse, Hong Kong IPO activity has relied on mainland enterprises in the past few years, which means the impact of external factors is relatively mild compared to other international stock exchanges.

“We foresee that there will be little change in the number of businesses interested in going public in Hong Kong, but uncertainties in the global economy may continue to affect the possibility, pricing and performance of upcoming IPO launches,” says Benson Wong. “Due to the impacts of Brexit, we believe there is much less chance of a US rate hike this year, and it will have limited impact on the Hong Kong IPO market,” he adds.

Greater China gears up

Evaluating the IPO market outlook in Greater China, the second half of the year is shaping up to be a stronger one with a robust IPO pipeline in both mainland China and
Hong Kong, says Terence Ho, greater China IPO leader at EY. Greater China will likely bounce back from its slow first half performance during which the number of deals was 101 IPOs, down from 236 IPOs from the same period last year. Capital raised was also down, to US$10.5 billion from US$40.7 billion in the first half of 2015.

Optimism comes from the fact that the Hong Kong Main Board and GEM and the Shenzhen Stock Exchange were the two most active stock exchanges globally in second quarter of the 2016 year to date by number of deals, while the Hong Kong Main Board led globally by capital raised and saw three of the top ten largest IPOs globally during that period. Ho notes that industrials, technology and consumer products were the most active sectors, driven by a number of IPOs of smaller companies that mainly listed
on the junior market GEM. But in terms of funds raised, financials led other industries. Mainland China banks were especially eager to get listed to access the capital
needed to fuel their growth plans. “Often, the route to an A-share IPO takes a relatively longer time, leading many mainland city banks to look at Hong Kong instead. Two
of the three largest deals in Asia in the first half of 2016 are examples of this sector,” says Ho.