Benefits of Listing Regime Reform Drive Hong Kong to Regain Top Spot in Global IPO Market in 2018
Sino-U.S. trade dispute to overhang Mainland and Hong Kong's IPO markets in 1H 2019
Central Economic Work Conference, economic stimuli may help support market environment and atmosphere
Published: 19 December 2018
According to the latest analysis released by the National Public Offering Group of professional services organization Deloitte China today, the initial public offering (IPO) market of Hong Kong has achieved stellar result as the top global listing venue in 2018 both in terms of number of IPOs and proceeds raised, following the major reform of the city's listing regime this year. Both the Shanghai and Shenzhen markets, however, were slower due to the direct impact of the Sino-U.S. trade tensions and subsequent trade war, the depreciation of the Renminbi, economic slowdown and stricter listing review throughout 2018.
As for the outlook towards these three IPO markets in 2019, the Firm believes that while companies continue to queue for share flotations in Hong Kong, a wider influence of the trade war on the global economy is likely to surface gradually during the first quarter of 2019. The IPO sentiment in Shanghai and Shenzhen will likely be supported by measures like the technology board, Shanghai-London Stock Connect and potential inclusion of more A shares into the MSCI. Developments during and after the trade war truce, pace of U.S. interest rate hike, the U.K. political scene, the final Brexit arrangements and timetable, and the Chinese local debt issue are, however, key events to watch for the capital flow indicators, investor appetite for IPOs, and business performance of many Chinese-backed IPO candidates next year.
As for 2018, Deloitte estimates Hong Kong would have about 208 new listings raising nearly HK$286.6 billion, according to available market information as at 14 December 2018. This would represent a rise of about 29% in the number of IPOs and 123% in proceeds when contrasted against 161 IPOs raising HK$128.3 billion in 2017. The number of new listing is at a new record high. Approximately 70% of the funds raised would come from large IPOs from Chinese companies, including those from the new economy and with different voting right structures.
"Initiating the new listing regime in April has diversified Hong Kong's IPO market spurring issuers from more different sectors and a wider range of sizes. Thus a new high reached this year in the number of IPOs. Despite the keen interest to go public in Hong Kong in future as demonstrated by a large number of listing applications, the uncertainty in the economic outlook and volatile market would impact the timing and the number of companies that can go public at last hugely. We anticipate investors will observe the outcome of the Central Economic Work Conference, a meeting that is to be held soon, and any potential sign of introducing economic stimuli to provide support for the downward pressure of the Chinese economy," said Mr. Edward Au, Co-Leader, National Public Offering Group of Deloitte China.
In 2018, the Chinese Mainland market, comprising the Main Board in Shanghai, and SME Board and ChiNext in Shenzhen, is likely to see a total of 106 IPOs raising approximately RMB140.2 billion in funding, both significantly dropping from 436 new listings and RMB230.4 billion in 2017 by 76% and 39% respectively. While the Main Board remains the most selected market, raising the most funds this year, ChiNext shows the steepest fall in the number of new listings over last year.
"While less active in 2018, the Mainland IPO market still experienced encouraging developments resulting from the regulator's continuous reform effort for this emerging capital market. One is the dominance of new economy companies among the market’s five largest IPOs up from none in 2017. Another highlight is the improvement in not being able to helping companies to raise funds in the capital market in a timely fashion, despite stricter review of their listing application," said Mr. Anthony Wu, A-Share Capital Market Leader, National Public Offering Group at Deloitte China.
The U.S. stock exchanges continue to be popular among Chinese companies especially technology, media and telecommunications enterprises, given the high concentration of technology-focused investment funds there. Underscoring this trend, in 2018, amid the bullish U.S. stock market, bourses there experienced a boost in IPOs from Chinese companies from 23 raising US$3.8 billion in 2017 to about 36 with proceeds of approximately US$9.4 billion.
As for the IPO forecast for Hong Kong in 2019, Deloitte expects around 200 IPOs raising proceeds of approximately HK$180-230 billion under the current market situation based on a pipeline of just over 200 IPO applicants. The new economy, including technology firms, pharmaceutical and pre-revenue biotech, and education companies are likely to attract the greatest market attention. Other potential highlights include some potential H-share listings from existing issuers of the National Equities Exchange and Quotations.
Mr. Au believes the listing platforms of the Mainland and Hong Kong will complement and supplement each other more over time on the back of the development of the Greater Bay Area, rise of more Chinese unicorns driving the new economy forward, and greater connectivity between the two capital markets. A broader and stronger impact of the new listing rules would also become more obvious when the macro-economic environment turns stable. More weighted voting rights (WVR) issuers can only be seen when WVR companies can receive a higher valuation under supportive market conditions.
As for the A-share market, Deloitte expects that a majority of the IPO issuers in 2019 will be small and medium manufacturing, technology and consumer businesses. Given numerous factors including the ongoing tight regulatory scrutiny, uncertainty of the outcome and development of the Sino-U.S. trade truce, and the ongoing decline of the Renminbi foreign exchange rate, Deloitte expects the A-share market to have 110-150 new listings raising RMB140-170 billion for next year.
"There are still positive conditions to advance A-share IPO activities such as the launches of the new technology board in Shanghai with a registration-based regime, the Shanghai-London Stock Connect and the inclusion of more A-share stocks into MSCI. The market is also anticipating the Chinese government to initiate more economic stimulus measures. However, if the macroeconomic fundamentals are not ideal, the performance of the capital market may be less vibrant," concluded Mr. Wu.
Notes to editor:
Unless specified otherwise, all statistics are updated as at 31 December 2018 with estimations of upcoming IPOs that will debut from 17-31 December 2018 to be priced at the mid-point of their indicative ranges.
Sources of the statistics for the Hong Kong IPO market: the Stock Exchange of Hong Kong, Deloitte's estimates and analyses, excluding the transfer of listings from GEM to the MB and proceeds of 16 newly listed companies on the MB raised from their market stabilisation actions by 31 December 2018.
Sources of the statistics for the A-share IPO market: China Securities Regulatory Commission, Deloitte's estimates and analyses.