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IPO activities to heat up in second half of 2019 after slow start in first half

  • Developments in Sino-U.S. trade negotiations and Brexit in April would affect capital flow and market liquidity
  • Sci-Tech Innovation Board in Shanghai to draw flock of new listings from mid-second quarter onwards
  • Capital markets of Mainland and Hong Kong are collaborating and complementing each other after success in dual-listing (A+H) and market connectivity program

Published: 3 April 2019

Professional services organization Deloitte China has today released its latest analysis of initial public offering (IPO) activities in the Chinese Mainland and Hong Kong during the first quarter (Q1) of 2019 as well as their forecast for the entire year. Findings from its National Public Offering Group indicate that uncertainty in Sino-U.S. trade conflict negotiations and Brexit affected worldwide IPO activities during Q1 of 2019. Hong Kong's stock exchange ranked second globally in terms of the IPO funds raised over Q1 2019 amid the reduced number and scale of new listings. Although new listings on the Mainland remained low due to strict regulatory requirements, stock exchanges in Shenzhen and Shanghai have surpassed other major bourses to occupy the third and fourth global positions.

Looking ahead, greater certainty in Sino-U.S. trade negotiations and Brexit in April will help boost the prospects of IPO markets by fueling the U.S. and Chinese economies, sentiment and liquidity towards new equities, and determining the overall capital flow. With the recent launch of acceptance and review of listing applications for the Sci-Tech Innovation Board, new listings are expected to flourish starting in the middle of second quarter. This marks closer collaboration of the Mainland and Hong Kong's capital markets and opens a new chapter for the growing new economy sector in China. More new paths of listing and listing models evolving from the existing dual-listing (A+H) and NEEQ+H models may gradually emerge helping to expand the two capital markets, reinforce the status of Hong Kong as an international financial center and further internationalize the A-share capital market.

As of 31 March 2019, Hong Kong saw 37 new listings raising HK$20.4 billion. The number of IPOs was reduced by 42% from 64 while the funds raised dwindled from HK$24.4 billion by 16% of Q1 2018. The significant slowdown was attributed to a plunge in the number of IPOs at the GEM and a lack of mega and large deals.

"The statistics, in particular the absence of large, prominent deals and a drop in the listing applications, may suggest a weakening performance of Hong Kong's IPO market. But we are also overjoyed about the market's ongoing resilience in attracting sufficient listings and liquidity to remain in second place globally despite uncertainties in the two world's largest economies, especially given their close economic ties with Hong Kong. This performance clearly demonstrates Hong Kong's position as a leading international financial center," said Mr. Edward Au, co-leader of the National Public Offering Group, Deloitte China.

Looking across the border, 31 IPOs raised RMB25.6 billion for the Mainland market, against 37 IPOs raising RMB40.7 billion in the same period of last year, representing a 16% and 37% decrease respectively. This year, the stock exchange of Shenzhen recorded 19 IPOs raising RMB15.2 billion (HK$17.7 billion) while that of Shanghai had fewer IPOs (12) and raised less funds (RMB10.4 billion/ HK$12.0 billion).

"The A-share market featured numerous IPOs from various city and agricultural commercial banks as well as securities firms which attracted liquidity. We expect similar additional listings to ease the downward pressure on the economy. A key Chinese government priority is to release more lending facilities from both larger and smaller banks to private enterprises, and small and micro businesses," commented Mr. Anthony Wu, leader of China's A-Share Capital Market, the National Public Offering Group at Deloitte China.

The IPO situation of Chinese companies in the U.S. dominated this year by new listings of Chinese securities firms displayed a similar pattern. Six IPOs were completed at NASDAQ raising US$260 million in Q1 2019 against 10 IPOs raising US$3.38 billion of the same period of last year. Both figures have substantially fallen by 40% and 92% respectively.

In addressing a major concern on whether Hong Kong's role as a financial hub would be marginalized after the launch of the Sci-Tech Innovation Board in Shanghai, Mr. Au noted that only a handful of potential issuers have considered a switch recently. But he said statistics in the U.S. market suggest that tech and new economy companies are waiting to see how the new board would operate. As such, the U.S. market recorded no new listing from the Chinese technology, media and telecommunications sector in Q1 2019.

Given the lingering uncertain macro-economic and political situation in Q1, Deloitte maintains its forecast for the IPO activities of Hong Kong in 2019, i.e., about 200 IPOs raising at least HK$180 billion. Two potential new listings raising at least HK$10 billion each are considering offerings in the city. There remains a possibility of seeing one or two new listings from weight voting rights companies when the market sentiment and liquidity improves given a high threshold for market capitalization at the time of listing.

"We anticipate IPO debuts on the Sci-Tech Innovation Board middle in the second quarter. How these new economy issuers will be valuated, priced, subscribed before the offering, and traded after the share flotation would have implications for future IPOs from new economy companies in both Hong Kong and the U.S. The A shares have been enjoying a better valuation for a long while, which may be elevated further in the early launch of the new board. However, as the new board's issuer base expands, investors turn mature, and the A-share market becomes more internationalized over time, the gap between valuation for A shares and stocks in Hong Kong is expected to gradually draw nearer in the longer run. Ultimately, these new listing candidates are likely to base decision of listing destinations on their business development strategies and target investor base ," analyzed Mr. Au.

As for the A-share market, Deloitte expects about 110-150 new listings raising RMB140 billion-170 billion are to be completed on the Main Board, SME Board and ChiNext in 2019. Stability in IPO activities and quality in the IPO issuers would continue to be key priorities for listing application review for the first three markets. Another 90-110 IPOs may ultimately also be launched on the Sci-Tech Innovation Board.

"We see a wide range of possibilities of how the first few batches of companies would go public on the Sci-Tech Innovation Board as well as a wide range in forecasted funds that may be raised there. We believe young new economy companies would find a more favorable fundraising position at the Sci-Tech Innovation Board. For those that are leading in the relevant new economy sectors, they may wish to go public in the international capital markets like the U.S. and Hong Kong. These markets would be able to provide a bunch of comparable issuers that give greater certainty in terms of the valuations," said Mr. Wu.

 

Notes to editor:

Unless specified otherwise, all statistics are updated as at 31 March 2019.

Sources of the statistics for the Hong Kong IPO market: the Stock Exchange of Hong Kong, Deloitte's estimates and analyzes, excluding the transfer of listings from GEM to the MB and proceeds of 12 newly listed companies on the MB raised from their market stabilization actions by 31 March 2019.

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

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