Mainland, Hong Kong IPO fundraising gap will close starting 2Q17: Deloitte

Improved macro-economic outlook will help narrow the gap.

In the first quarter of 2017, the New York Stock Exchange reclaimed the top spot in the world in terms of total initial public offering (IPO) proceeds with the market excited about the positive outlook of U.S. economic policies, according to Deloitte.

At the same time, encouraged by the regulator, new listings hastened on the Chinese Mainland and surpassed the number afforded by the Hong Kong market which was dominated by small offerings, according to the National Public Offering Group of professional services organization Deloitte China.

With the macro-economic outlook becoming clearer, the gap between the performance of Mainland and Hong Kong IPO markets is expected to narrow from the second quarter onwards.

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In the first quarter ended 31 March 2017, Hong Kong completed 39 new listings raising HK$13.3 billion, a 105% rise in the number of IPOs, but 53% drop in the funds raised, against 19 IPOs raising HK$28.0 billion in the same quarter in 2016.

Similar to the same period in 2013, when the market was hit by speculations over the U.S. quantity easing measures, no mega or large scale offering was recorded during the quarter. The market welcomed IPOs from education institutions following a wave of financial services institutions that dominated earlier.

"It was in line with the anticipation of a slow start for Hong Kong in 2017. In another few months though, when the market has become used to U.S. interest rate hikes, China’s economic performance stabilizes, impacts of the Brexit subside and major elections in the Eurozone are over, the economic environment is going to zest up and Hong Kong is expected to see more larger new listings from the Chinese financial services and technology, media and telecommunications sectors. These offerings are going to be those benefiting from ongoing reform in the Chinese financial sector and companies thriving in the new economy," said Edward Au, Co-Leader, National Public Offering Group of Deloitte China.

With three to four jumbo listings expected for the year and more than 100 active listing applications in the pipeline, it is clear that local and international companies are keen to go public. Deloitte's IPO forecast for Hong Kong in 2017 is at least 120 IPOs raising funds about HK$160 billion.

Au added, with the different market connect programs launched and thanks to more capital inflow from other international markets and the Chinese Mainland, the valuation of Hong Kong's stocks rose, which is one of the major considerations for companies to list in Hong Kong.

Therefore, for the IPO market to stay competitive in the longer run, it is crucial that Hong Kong maintains the capability to draw international funds and investors and operate a world-class market, he explained, it is particularly important because the global IPO market is increasingly weighted of small and medium offerings.

With the stock market on firm footing in the first quarter of 2017, significantly more IPOs have been given the green light to list in the A-share market. By the last trading day in March 2017, the A-share market had taken in 134 IPOs raising RMB69.6 billion compared to 24 IPOs raising RMB11.7 billion in the first quarter of last year, a near five-fold surge in both the number of new listings and fund raised.

As the Main Board in Shanghai is still the first choice among more prominent issuers, Shanghai beat the SME Board and ChiNext in Shenzhen in terms of proceeds.

"Though the new share issuance registration-based regime is no longer mentioned in recent discussions of amendments to the Chinese Securities Law, as long as the stock market is stable, IPO pace in the remaining months of the year is expected to stay," said Anthony Wu, Leader of China A-Share Capital Market of the National Public Offering Group at Deloitte China. As such, Deloitte expects the existing more than 600 listing applications to be approved and taken to market in the next 18 months at the soonest.

The IPO forecasts for the Chinese Mainland in 2017 are between 380 and 420 in number and raising between RMB250 billion and RMB280 billion. Most of them will be from the manufacturing and technology sectors and there will be about two to three large potential listings destined for Shanghai.

"Deloitte is positive about the outlook of the Chinese IPO market. In addition to effort to speed up IPOs, the regulator stepping up scrutiny of backdoor listing, refinancing and speculative activities among listed companies and pushing forward with reform to build a multi-tier capital market are going to see the A-share market shape up and become healthier in the long run," elaborated Wu.

Against these backgrounds, the Shanghai Stock Exchange, which came second in the first quarter, it may be competing head-to-head in the upcoming three quarters, with the Hong Kong Stock Exchange in the fifth place, if the market continues to be supportive. The New York Stock Exchange is likely to benefit from a strong U.S. stock market and positive economic policy outlook and retain one of the top three positions in the ranking of IPO proceeds in the rest of 2017.

When most key global political and economic events are concluded by end of the second quarter, the prospect of the global IPO market is expected to become clearer.