Accounting and Auditing

Hong Kong’s cross-border connection paves way for major IPOs

Pipeline of 170 deals at end of August raises prospect of record-breaking 2017

PUBLISHED : Sunday, 17 September, 2017, 11:01am
UPDATED : Sunday, 17 September, 2017, 11:01am

Hong Kong saw a 56 per cent rise in the number of initial public offerings (IPOs) on the Main Board and GEM Board in the first eight months of the year compared to the corresponding period in 2016, while the amount of funds raised fell by 5 per cent.

 

“Driven by the strong stock market and reasonable pricing, the oversubscription of Main Board IPOs this year was 93 per cent as of August 25. It was only 70 per cent during the same period last year,” says Ringo Choi, EY Asia-Pacific IPO leader.

“The authorities have maintained the fast pace of new share listings for the A-share market. As of August 25, 311 IPOs have raised 157 billion yuan
(HK$187.7 billion ), a 199 per cent rise in the number of deals and a 153 per cent increase in funds raised, compared with the same period in 2016.”

Benson Wong, PwC Hong Kong’s entrepreneur group leader, thinks the segmentation of IPOs has been more evenly distributed. Overall pricing and price-earnings ratios are improving, which shows that investors are relatively optimistic about the future. There are a growing number of foreign companies listing in Hong Kong, which proves the attractiveness of the market and helps to strengthen the city’s position as the leading international fundraising hub in the region.

“The second half of 2017 is more challenging,” Wong says. “Market sentiment could be affected by economic and political risk factors around the world. However, China’s economy has retained its mid-to-high growth, which is encouraging the development of Chinese companies and increasing fundraising demand. We expect a record-breaking 160 IPOs in 2017. There is still a chance of some mega-sized IPOs in the fourth quarter, making Hong Kong one of the three strongest markets globally.”

Edward Au, co-leader of the national public offering group at Deloitte, says that although it is impressive to see Hong Kong completing nearly 100 IPOs by the end of August 2017 against 65 new listings in the same period last year, it has yet to surpass its peers, New York, Shanghai, London and Shenzhen, which raised more funds for a variety of reasons, such as having larger deals, to completing a much larger number of IPOs.

“Hong Kong had a pipeline of more than 170 IPO applications by the end of August,” Au says. “In addition, plans for about two to three large to mega IPOs mainly by technology-related businesses are likely to be completed before the end of 2017. If the upcoming macro-economic performance and political events – including Chinese economic data, expectations over a potential delay in a timetable for US interest rate hikes, US tax reform, as well as China’s 19th National Congress in October – could help create favourable conditions, we look forward to seeing Hong Kong ascend to a higher position in the global IPO ranking by the year end.”

Choi thinks Hong Kong can maintain its top position among global stock exchanges by adopting multiple strategies.

“It needs to strengthen its connection with mainland China,” he says. “For example, the ‘primary equity connect’ [IPO connect] can attract more IPO candidates to be listed in Hong Kong. The city can become a fund-raising hub as part of Beijing’s global trade strategy, the “Belt and Road Initiative”, and promote technology companies for its IPO market. Innovative methods, such as the New Board, may attract more future ‘unicorns’ to be listed in Hong Kong.

“Meanwhile, mainland Chinese companies have dominated Hong Kong’s IPO market in the past few years.

“As an international capital market, Hong Kong needs to attract more cross-border companies to improve the diversification of listings.”

China’s economy has retained its mid-to-high growth, which is encouraging the development of Chinese companies and increasing demand for fundraising. We expect a record-breaking 160 IPOs in 2017
Benson Wong, PwC Hong Kong entrepreneur group leader

Katharine Wong, KPMG China’s partner, capital markets group, says the New Board proposed by the Hong Kong Exchanges and Clearing (HKEX), targeting technology or new-economy firms with non-standard governance structures to list in Hong Kong, could help to broaden the market base.

“This could prompt more ‘new economy’ companies in China and Asia to list in Hong Kong,” she says. “In addition, the New Board will allow Chinese companies already listed overseas to have secondary listings in Hong Kong. This will be an attractive measure as these companies could benefit from the city’s Stock Connect schemes with China.

“By offering a new funding channel for companies that were previously not allowed to list in Hong Kong, the New Board will help provide investors with more options. This would strengthen Hong Kong’s attractiveness as a leading IPO hub.”

Benson Wong welcomes the HKEX’s consultation and the concept of a New Board. He thinks it could address the funding needs of different kinds of companies, help them to source and match appropriate investors, and clear the obstacles to the development of Hong Kong’s capital markets by attracting a certain amount of start-ups, ‘new economy’ companies and Chinese companies listed overseas, to relocate their listing to Hong Kong. He says: “Given ‘new economy’ issuers are of a higher perceived risk than traditional issuers, to uphold the quality of shareholder protection, it is recommended that the HKEX adopts measures that would facilitate investors’ differentiating ‘new economy’ issuers from traditional issuers and impose mandatory safeguards for companies with Weighted Voting Rights structures, in addition to disclosure requirements.”

The GEM Board has also performed strongly this year. Fifty-one IPOs had raised HK$4 billion on the GEM
Board by August 25, a 104 per cent rise in the number of deals and a 110 per cent increase in funds raised compared to the first eight months of last year, Choi says.

Katharine Wong says the measures introduced by regulators to curb speculative trades ensured GEM stocks were less volatile than in 2016.

“Upcoming reform of GEM has led some companies to speed up their listing plans amid a tightening of the listing requirements,” she says. “The influx of GEM listings has driven up the total number of IPOs in Hong Kong – a trend expected to continue for the rest of the year.”

Au says the GEM was more popular than the Main Board among IPO issuers in terms of the number of IPOs by the end of August. “We also continued to see the number of applications for listing on the GEM exceeding that of the Main Board,” he says. “This represents a dominance of small- and medium-sized offerings in Hong Kong at least until the end of this year.”