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New economy unicorns to take firm roots in Mainland and Hong Kong's IPO markets commencing in the second half of this year

Stronger U.S. dollars, rising Sino-U.S. trade tensions, weakening Chinese economy and a probable Gray Rhino for Eurozone's outlook may bring volatility affecting listing window and size of larger deals

Published: 19 June 2018

In its latest report on the initial public offering (IPO) markets of the Chinese Mainland and Hong Kong in the first six months of 2018 released today, the National Public Offering Group of professional services organisation Deloitte China (Deloitte) indicated that the new listing regimes and hot market expectation have given a strong boost to the share flotations of new economy companies in both markets, including some well-known Chinese unicorns starting this July. These trends are likely to help raise the rankings of both the stock exchanges in Shanghai and Hong Kong in the global IPO fundraising league by the end of 2018. However, the listing windows and size of these eye-catching deals may depend upon a more stable capital market amid the emerging issues such as stronger U.S. dollars, rising Sino-U.S. trade tensions, weakening Chinese economy and a probable Gray Rhino for Eurozone's outlook in the second half of the year.

Including IPOs that are planned to commence share trading from 21 June 2018, Deloitte expects Hong Kong to have 101 new listings raising approximately HK$50.3 billion by the end of June 2018. This translates into a 49% rise in the number of new listings from 68 IPOs and a 8% drop in the IPO proceeds raised from HK$54.8 billion when compared with the first six months of 2017.

"Hong Kong's IPO market remained vibrant in the first half of 2018. The keen go-public enthusiasm from small- and medium-sized enterprises (SMEs) was not dampened by a rise in the listing requirements for both the Main Board and GEM and events like a reduction of the U.S. balance sheet, and the trade clash between the U.S. and China. Both the numbers of new listings for the first six months of 2018 and the second quarter itself each achieved a record high. However, the strong domination of small- and medium-sized issuers also resulted in a further reduction in the average deal size," noted Mr. Edward Au, Co-Leader of the National Public Offering Group, Deloitte China.

On the contrary, the A-share market has maintained a slow momentum since the beginning of 2018 with fewer approved IPOs. It is likely to end with 63 IPOs raising RMB93.1 billion by 30 June 2018 against 246 IPOs raising RMB125.5 billion in the first six months of 2017. Both the number of new listings and proceeds raised would be down by 74% and 26% respectively. Boosted by the IPO of Foxconn Industrial Internet, the world's second largest IPO year to-date, and other larger deals, the Shanghai Stock Exchange surpassed the Shenzhen Stock Exchange with its overall proceeds of RMB64.6 billion compared with about RMB28.6 billion for the latter.

"With the introduction of IPOs and Chinese Depository Receipts (CDRs) for innovative Chinese companies, as well as the recent tighter listing application review guidance, the A-share market is transforming from a high volume IPO deal market to a quality-focused one. More applications were rejected and fewer approved cases were recorded in the first six months of 2018 against the full year of 2017. These trends are likely to result in a capital market with greater stability supported by more high profile, quality issuers in the medium-to-the long run," said Mr. Anthony Wu, Leader of the A-Share Capital Market of the National Public Offering Group at Deloitte China.

As for the global IPO proceeds race, the stock exchanges that completed more mega listings naturally have continued to take higher positions. Given its strong track record in raising huge funds, the New York Stock Exchange remained the most well-received listing destination in the world among the issuers, followed by NASDAQ. The elevation of the Shanghai Stock Exchange's position with a jumbo listing from new economy sector over the Deutsche Börse Group highlighted the rise and important role of Chinese unicorns to the global capital market. Hong Kong Stock Exchange is to come fifth through a high volume of new listings.

"We are excited to see various regulatory breakthroughs in this first half, including the new listing rules for biotech and weighted voting rights companies and secondary listings, the opening up of H-share listing applications to eligible issuers of China's new third-board, and approvals of full circulation pilot programme of two Hong Kong-listed H-share companies. Through diversifying the listings to the new economy and emerging sectors, removing certain listing 'obstacles' like companies with different voting classes that are in general accepted by other international markets such as the U.S., and allowing H-share issuers to fully convert their domestic shares, Hong Kong's IPO market status as an international fundraising center is poised to elevate to a new level and its role as a spring board to support the growth of Chinese small and medium-sized enterprises and the industry leaders is to underscore," said Mr. Au.

Deloitte's latest analysis indicates that at least five IPOs with each raising from HK$10 billion related to the financial services, technology and consumer businesses in the new economy business models and new listings of around 10 unicorns are set to list in Hong Kong during the second half of 2018. Other highlights include Chinese Mainland and international biotech companies that will apply under the new listing rules, education institutions and financial services companies. However, coupled with an observation that majority of the candidates in the IPO application pipeline are small and medium in scale, Deloitte maintains its forecast of around 180 IPOs raising approximately HK$160-HK$190 billion in proceeds for the full year of 2018.

Given the limited number of innovative companies eligible for the issuance of shares or the CDR, and listing reviews remaining tight, Deloitte anticipates the Mainland IPO activities in the second half of 2018 to perform similarly to the first half. It is forecasted to have around 120-160 companies raising approximately RMB170-200 billion for the full year. The vast number of small and medium manufacturing, and technology and retail companies in the listing application queue represents their domination in the number of upcoming new listings in the A-share IPO market in the remaining of the year.

Mr. Wu also noted the further opening up of the Chinese capital market to global investors, including the additional daily quota under the market connectivity programs between the Mainland and Hong Kong, and the admission of selected A-share stocks into the MSCI. These developments combined with the imminent launch of the Shanghai-London Stock Connect imply that the valuation of A shares would approach the level of their peers and that A share prices would subsequently become more sensitive to global events in the longer run.


Notes to editor:

Unless specified otherwise, all statistics were updated with estimations as at 30 June 2018.

Sources of the statistics for the Hong Kong IPO market: the Stock Exchange of Hong Kong, Deloitte's analyses, excluding the transfer of listings from GEM to the MB and proceeds of 10 newly-listed companies on the MB raised from their market stabilisation actions by 30 June 2018.

Sources of the statistics for the A-share IPO market: China Securities Regulatory Commission, Deloitte's analyses.

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