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HKEX Special

Deal or no deal: Hong Kong’s IPO market loses out to New York, Shanghai and Shenzhen rivals

The lack of sizeable deals led average deal sizes at HKEX to decline by almost a third

PUBLISHED : Tuesday, 27 June, 2017, 4:23pm
UPDATED : Tuesday, 27 June, 2017, 4:23pm

Given the uncertainties over growth in mainland China’s economy and more US interest rate hikes, total fund raising in Hong Kong in the first quarter of 2017 was lower than in the corresponding period in 2016, and the city lagged behind New York, Shanghai and Shenzhen as the fourth largest initial public offering (IPO) market.

However, there was a tremendous increase in the number of small- to medium-sized floatations. This shows that Hong Kong’s IPO market has remained active and has not been affected by the ramping up of A-share listings, says Benson Wong, entrepreneur group leader, PwC Hong Kong.

Maggie Lee, head of the capital markets development group, Hong Kong, KPMG China, says the Hong Kong IPO market has had a busy year with total funds raised up 13 per cent year-on-year, as of the end of May 2017.

The lack of sizeable deals meant average deal sizes have declined by almost a third.

“Still, Hong Kong remains one of the most popular listing destinations,” she says. “We are seeing a greater amount of diversification in both industry and geographical composition. We have seen IPOs from emerging sectors such as education, health care and life sciences this year.

“Meanwhile, more overseas companies, especially from Asean countries, are seeking Hong Kong IPOs. With more than 120 active applications, the outlook for the city’s IPO market remains positive.”

In the first four months, Hong Kong Exchanges and Clearing (HKEX) ranked behind New York Stock Exchange (NYSE), Shanghai Stock Exchange and Shenzhen Stock Exchange, says Ringo Choi, EY’s Asia-Pacific IPO leader. “Thanks to mega IPOs, IPO activity on NYSE has been robust and it raised over US$13 billion in the first four months of 2017, 215 per cent up compared to the first half of 2016.

“The top two IPOs in NYSE, Snap Inc and Invitation Homes Inc, raised US$5.68 billion, which accounted for about 43 per cent of the total proceeds raised in the first four months of 2017.

“Shanghai and Shenzhen stock exchanges also experienced tremendous increases in the first five months of 2017, up 607 per cent and 226 per cent in terms of proceeds respectively, due to the acceleration of IPO issuance trigged by the Chinese government,” Choi notes.

Wong says that Hong Kong’s IPO market is a fundraising platform that faces the international markets with backing from the mainland. Despite the economic slowdown, China is expected to maintain a medium-to-high growth rate of 6 to 7 per cent. This will boost domestic enterprises and create further opportunities. Their continuing financing needs will also support the performance of the IPO market in Hong Kong. The launch of the Stock Connect schemes with Shanghai and Shenzhen has enabled Hong Kong to expand its investment base and improve investor sentiment. This will reinforce Hong Kong’s strategic position as an international fundraising platform within China’s multi-layered capital markets.”

Approximately 140 companies have submitted IPO applications to the HKEX, an increase of more than 20 per cent since the beginning of the year. In addition, a number of new economy and hi-tech companies are considering their IPO plans. To attract more of these high-potential companies to list in Hong Kong, market reforms need to accelerate and deepen. New measures favourable to financial markets could be introduced during the 20th anniversary of Hong Kong’s return to Chinese sovereignty, Wong notes.

Edward Au, co-leader, national public offering group at Deloitte China, says the Chinese capital market and IPOs are showing signs of a slowdown and dwindling liquidity. There is uncertainty whether further reform will be introduced that might slow down IPO activities. Mainland companies that need to reach out to the international market to raise large funds will find Hong Kong is able to offer funds to support such development.

“Another two to three mega offerings from the financial services industry are expected,” Au says. “But given the uncertain political outlook in the euro zone and continuous speculation over the timing of the next US interest rate hike, the offerings are likely to make their debut when the market situation is supported by more positive developments, such as improved economic performance in China and at

the 19th National Congress of the Communist Party of China in autumn.”

More overseas companies, especially from Asean countries, are seeking Hong Kong IPOs. With more than 120 active applications, the outlook for the city’s IPO market remains positive
Maggie Lee, KPMG China

The average price-to-earnings ratio of stocks on the main board is about 14 times, which is closer to the level in 2010, which ranged between 15 and 17, Au adds. “This will become one of the strong push factors for companies to list here, including international companies and in particular larger issuers, at least for the rest of 2017.”

Choi says the authorities are mulling over actions to make Hong Kong a more attractive IPO platform. The initiatives include: greater integration between Hong Kong and mainland China by deepening stock connect; and expanding connections to other financial areas besides the stock market, such as “Bond Connect” and “IPO Connect”.

“They are also looking to get more involved in China’s go-global trade plans by positioning the city as a fund-raising centre for projects such as the ‘Belt and Road Initiative’. Consultation about the ‘third board’ has been launched.

“This board may allow companies to list with dual-class share structures in an attempt to attract more technology and new-economy firms to list in Hong Kong. More action will be taken to attract more large or mega cross-border listings.”

KPMG China’s Lee thinks that on top of the upcoming consultation about a new board for start-ups and technology enterprises, the consultation review of the GEM board is expected to make the Hong Kong IPO market better stratified to cater to the needs of companies with different structures and at different stages of growth. “The anticipated launch of Bond Connect and IPO Connect will also improve market liquidity.

“For the long run, Hong Kong should concentrate on diversifying the geographical and industry composition of its IPO market.”