Hong Kong remains in pole position for IPOs
HKEX’s key targets ahead will be technology startups, mainland firms looking to expand overseas, Belt and Road Initiative-related companies
Hong Kong has been the world’s second largest initial public offering (IPO) market by value over the past two decades, driven mainly by the listing here of a swathe of mainland companies.
But there is one sector in particular that the market has largely failed to attract strong applicant interest from, technology and new economy companies, which continues to be dominated by New York.
According to Thomson Reuters data, Hong Kong was the world’s largest IPO market by value last year, raising US$24.53 billion.
In 1997, the city languished in eighth place, when new listings were worth just US$5.7 billion.
In the past two decades it has topped the global IPO list in 2015, and from 2009 to 2011.
As a running total, over those 20 years, some US$388 billion has been raised in Hong Kong up to the first quarter of 2017, ranking it second over that timescale to New York, which remains well ahead at US$675.8 billion raised.
Arguably the missed listing that hurt officials in Hong Kong the most was that of mainland China e-commerce giant Alibaba Group, which chose the New York Stock Exchange to host the world’s largest IPO to date, for US$25 billion in 2014. Alibaba now owns the South China Morning Post.
But on the flipside, Hong Kong has also scored notable victories over its Manhattan rival, hosting the world’s second and third biggest floats: Agricultural Bank of China’s US$22.1 billion listing in 2010 and Industrial and Commercial Bank of China’s US$21.96 billion offering in 2006.
“Prior to 1997, the Hong Kong stock market was dominated by traditional Hong Kong-based companies, such as British conglomerates or local companies in the utilities, finance, real estate or trading sectors,” said Johnson Chui, the managing director and head of Asia-Pacific equity capital markets at Credit Suisse.
“Today, it is an international hub, playing an important role of being the gateway to China.”
Mainland Chinese companies have dominated Hong Kong’s IPO market, last year raising HK$156.6 billion in the city, representing 82 per cent of all listings.
By the end of 2016, 1,002 mainland Chinese firms were listed in Hong Kong, representing half the bourse’s total 2,009 companies. They represented 63 per cent of the total market capitalisation and 69 per cent of turnover.
“Hong Kong will continue to play a leading role as an important gateway for Chinese companies to access international markets – but Hong Kong will need to adapt to the rapid changes taking place in the markets,” Chui said.
Hong Kong Exchanges and Clearing (HKEX), which runs the stock exchange, on June 16 issued a public consultation on the proposal to launch a New Board, or the so-called Third Board – on top of the main board and the Growth Enterprise Market (for growth companies that do not fulfil the requirements of profitability or track record) – with more flexible rules to attract tech firms.
The New Board will have two markets – one for mega companies that match all the main board requirements but who cannot list here because they have dual-class stock structures, while the other will be for start-ups.
A dual-class structure refers to when a company issues various types of shares with different voting rights – favoured by many technology firms as their founders usually hold minority stakes but want to keep control.
Hong Kong bans companies with such a structure while the US allows them to list, which is one reason why Hong Kong has previously lost out to some technology offerings.
The consultation process for the New Board will last for two months. If it gains enough support, the HKEX will issue a second consultation on detailed rules of the New Board which may then be launched sometime next year.
Financial firms still dominate the Hong Kong market with 69 per cent of the funds raised last year, while tech firms accounted for a mere 3 per cent, according to consulting firm PwC.
Gordon Tsui, the managing director of Hantec Pacific, has no doubt Hong Kong’s role as a platform for raising funds for mainland companies will continue.
“However, we have a biased profile for our IPO market. We focus very much on attracting Chinese companies – particularly mainland banks and brokers. We haven’t done well in attracting international firms to list here.”
Brett McGonegal, the chief executive at Capital Link International, said the ability of Hong Kong to allow dual-class shares companies and attract technology firms are the key issues for Hong Kong’s IPO market in the future.
“The exchange needs to be innovative and prove it can adapt and evolve as fast and efficiently as the companies they wish to attract to list. There is no upside to cutting-edge technology companies listing on outdated exchanges that have not recognised the times are changing,” McGonegal said.
Christopher Laskowski, the managing director and head of corporate and investment banking at Citi Hong Kong, says Chinese companies like to list in Hong Kong as they can gain access to international markets.
Their numbers are increasing all the time via the two Stock Connect cross-border share-trading schemes, which allow mainlanders to buy stocks listed in Hong Kong while international investors can buy stocks listed in Shanghai and Shenzhen.
Through the schemes, the so-called Southbound investment represented 9 per cent of all Hong Kong turnover in the first quarter of the year.
“Hong Kong’s well-oiled IPO process and stable regulatory regimes are also key reasons why investors and Chinese companies favour the Hong Kong market,” Laskowski said.
Depending as strongly as the Hong Kong market does on mainland business, and being linked so inextricably with it, the city will naturally be affected by any slowdown of the Chinese economy.
“A number of corporate governance issues have arisen involving China companies although we believe they remain company specific, rather than market wide,” he said.
But as projects eventually become reality within the Chinese government’s flagship “Belt and Road Initiative”, which is dominated by the building and financing of infrastructure projects in some 65 countries, Laskowski is hopeful too that many of the companies involved will be looking to Hong Kong for their funding choices, ensuring its strong IPO traffic levels will continue unabated, and become even more diversified.
The article has been corrected to say mainlanders can buy stocks listed in Hong Kong, not in Shanghai and Shenzhen, while international investors can buy stocks listed in Shanghai and Shenzhen under the two Stock Connect schemes in the 25th paragraph