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Hong Kong IPO market set to improve over next five years
Hong Kong Exchanges and Clearing celebrates the 24th anniversary of its listing on 21 June 2024.
China News Service | China News Service | Getty Images
High US interest rates, regulatory scrutiny, slower economic growth and US-China tensions Greater China Restricted IPOs in the last three years.
EY said in a report that while IPO volumes and proceeds in the US increased significantly in the first half of 2024 compared with the same period last year, mainland China and Hong Kong saw a sharp decline in listings.
Many of the macro trends are starting to shift, which could support more IPOs in Hong Kong, said Chan, who is based in Shanghai.
“We’re seeing a trend reversal,” he told CNBC. “We’re seeing more of these [U.S. dollar] funds, they are returning to Hong Kong. The main reason is that Hong Kong has already taken these uncertainties into account.”
O Hang Seng Index has risen more than 5% year to date after four straight years of declines — which was the worst losing streak in the index’s history, according to Wind Information.
“Our HK capital markets team is very busy and has a strong pipeline for H2. We expect to see many listings on the HKSE,” Marcia Ellis, global co-head of the private equity practice at Morrison Foerster in Hong Kong, said in an email on Wednesday.
Many companies that were waiting for a listing on mainland China’s A-share market have decided to switch to one in Hong Kong, she said. “Previously [China Securities Regulatory Commission] approval was slowing things down, but recently our team has been getting CSRC approvals pretty quickly.”
In June, China issued new measures to promote venture capital, and authorities have spoken publicly about supporting IPOsespecially in Hong Kong. Investors and analysts said they are now watching the speed of IPO approvals for signs of a significant shift.
Chan said another factor in Hong Kong’s IPOs’ favor is that many of the companies listed on the market are based in mainland China, where economic growth is “quite satisfactory.”
He expects consumer companies could be among the IPO beneficiaries in the short term.
“As the economy slowly recovers, many people in China are willing to spend,” he said, noting that this was mainly the case in less developed parts of the country.
Official national data showed that retail sales are growing more slowly in China — increased only 3.7% in May compared to last year, compared to growth of nearly 10% or more in previous years.
Also significant for global asset allocation, the U.S. Federal Reserve and other major central banks are pulling back from aggressive interest rate hikes. High rates have made Treasury bonds a more attractive investment for many institutions instead of IPOs.
“I would say if the interest rate can be reduced further, perhaps 1%, that would have a significant effect on the IPO market,” Chan said.
Hong Kong IPOs raised $1.5 billion during the first half of the year, down 34% from a year ago, EY said in a report released late last month. In 2021 and 2020, the Hong Kong Stock Exchange saw nearly 100 or more IPOs a year raising tens of billions of dollars, according to the report.
By comparison, mainland China IPOs raised $4.6 billion in the first six months of 2024 — an 85% drop from the same period a year earlier, according to EY.
Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Limited, said during a conference last week that so far this year, the Hong Kong exchange has received 73 new listing applications — a 50% increase compared to the second half of last year. She is not related to EY’s George Chan.
“The pipeline is forming nicely,” she said, noting that about 110 IPOs in total are in line for a Hong Kong listing. “All we need is a set of good market conditions for these things to come out and get priced well,” she added.
“What we need is a strong pipeline,” EY’s Chan said. “We need an interested investor with money to invest, and we need good aftermarket performance.”
Hong Kong’s IPO returns are improving. The average first-day return for new listings on the Hong Kong stock exchange in the first half of 2024 was 24%, up from an average of 1% in the same period last year, according to EY.
“The performance of the Hong Kong IPO aftermarket has been very good compared to the past five years,” Chan said. “These things combined are projecting an upward trend for the Hong Kong market. [in the] next 5 years.”
Chan said he expects the number of deals to increase in the second half of 2024.
He said they would likely be mid-sized — between HK$2 billion and HK$5 billion ($260 million to $640 million) — but added that he expected the market to improve in 2025.
Slowing economic growth and geopolitical uncertainty have also weighed on early-stage investment in Chinese startups.
Total venture funding from foreign investors in Greater China deals fell to $19 billion in 2023 from $67 billion in 2021, according to Preqin, an alternative asset research firm.
U.S. investors have not participated in the biggest deals in recent years, while investors from Greater China have remained involved, the firm said in a report last month.
As for IPOs by China-based companies in the U.S., EY’s Chan said he expects the current scrutiny on listings to be “temporary,” although data security rules would continue to be an obstacle.
In early 2023, the China Securities Regulatory Commission formalized new rules requiring domestic companies to comply with national security measures and personal data protection law before listing overseas. A China-based company with more than 1 million users to undergo Beijing cybersecurity review to list abroad.
“As time goes by, when people are more familiar with Chinese [securities regulator] approval process and they are more comfortable with geopolitical tensions, more of the big companies… would consider [the] The US market as the final destination,” Chan said.
“When the time comes, I believe institutional investors will be interested in these big Chinese companies because they really want to make money.”
He declined to comment on specific IPOs and said certain high-profile listing plans were “isolated incidents.”
Chinese ride-hailing company Didi, which delisted in New York in 2021, has denied reports that it plans to list in Hong Kong next year. Fast-fashion company Shein, which does most of its manufacturing in China, is trying to list in London after criticism in the US, according to a CNBC report.