Mainland and Hong Kong's IPO markets may be transformed by new economy companies starting from the second half onwards

Published: 3 April 2018

The National Public Offering Group of professional services organization Deloitte China today released its latest insights for the initial public offering (IPO) markets of the Chinese Mainland and Hong Kong. The stock exchanges in Shanghai and Hong Kong fell behind those of New York, Frankfurt and NASDAQ, which saw significantly larger deals, in the global IPO proceeds race during the first quarter of 2018. But global investors are expected to turn their attention to both the Chinese Mainland and Hong Kong IPO markets, which are anticipated to welcome new economy companies, especially some renowned unicorns starting from the second half when the respective revised listing rules may come into effect. In the meantime, continued capital outflow into the U.S. resulting from the tax reform and interest rate hikes there, and escalated trade clash between the U.S. and China, as well as the ongoing Brexit negotiations may affect the investment sentiment of global capital markets.

As at 31 March 2018, Hong Kong saw 64 new listings raising HK$24.4 billion against 39 IPOs raising HK$13.3 billion over the same period of 2017. This represents an increment to both the number of IPOs and IPO funds by 64% and 84% respectively.

"Driven by the active IPO activities at GEM, a record high number of IPOs took place. The proceeds were boosted by three large IPOs from a Chinese bank and two Chinese property-related companies. New listings of a few local well-received brands further boosted market sentiment. For these reasons, the overall performance of Hong Kong's IPO market in the first quarter looked strong despite developments like the continued normalization of the U.S. interest rate, reduction of the U.S. balance sheet, and trade clash between the U.S. and China," noted Mr. Edward Au, Co-Leader of the National Public Offering Group, Deloitte China.

After scoring a record high IPO performance in 2017, the A-share market made a slow start in the first quarter of 2018. The two stock exchanges in Shanghai and Shenzhen completed 37 new listings altogether raising a total of RMB40.7 billion. This is a significant 72% drop in new listings from 134 and 42% reduction in the IPO funds from RMB69.6 billion over the same period of 2017. In terms of IPO proceeds, the Shanghai Stock Exchange bested (RMB21.6 billion) its Shenzhen peer (RMB19.1 billion) with more large offerings.

"The slowdown of IPO activities, including a higher rejection rate for applications, as well as the latest market consultations for the IPOs/ Chinese Depository Receipt (CDR) issuance for innovative Chinese businesses, indicates how the A-share market is still undergoing substantial reforms. At the same time, we are seeing improvement in the average offering size among IPOs and the number of companies awaiting IPO review. So we are positive that these changes are intended to help create a higher quality and healthier capital market over the longer run, given its maturity as compared to other developed markets," said Mr. Anthony Wu, Leader of A-Share Capital Market of the National Public Offering Group at Deloitte China.

Similar to past quarters and years, the success for the New York Stock Exchange to claim the top position in the global market remains with attracting the higher number of mega and technology IPOs. These new listings raised at least HK$10 billion each. That explains why the Frankfurt Stock Exchange and NASDAQ lagged behind in second and third place. The Shanghai Stock Exchange slightly exceeded Hong Kong with more big new listings as well.

Mr. Au said that although a number of unicorns may plan to list in Hong Kong, the proposed A-share/ CDR issuance plan by the Chinese authorities will certainly draw interests from some prominent issuers that are now listed in the U.S., potential domestic innovative companies from the seven designated sectors, and larger-scale unicorns that are ready to go public. Taking into the consideration that offerings from biotech companies that do not meet any of the financial eligibility tests of the Main Board (MB) are unlikely to be mega in size and the number of weighted voting rights companies is limited, Deloitte maintains its forecast for Hong Kong's IPO market outlook in 2018.

In that forecast of around 150-160 IPOs raising approximately HK$160-HK$190 billion for the full year of 2018, Deloitte anticipates at least five mega IPOs with new economy concepts related to the healthcare, fintech and technology sectors. A few biotech companies with Chinese or overseas background are expected to seek listings in Hong Kong once the new rules become effective in late April. Southeast Asian property-related businesses in particular from Singapore will remain a key driver for international listings in Hong Kong for its higher valuation. Last but not least, education institutions will continue to apply for IPOs following the introduction of the new Chinese private education laws last September.

Mr. Au said the current reform to Hong Kong's IPO regime, including the new listing requirements for the MB and GEM effective mid-February, and the upcoming listing rules amendments for biotech companies that do not meet any of the financial eligibility tests of the MB, weighted voting rights companies and concessionary listing channels for secondary listings, is expected to transform Hong Kong's capital market to the next level. Following the launch of different market connectivity programs, the potential plan of allowing overseas-listed jumbo red chips and local companies from the seven innovative sectors that are not yet listed overseas to issue A shares/ CDRs would complement well Hong Kong's new regime of offering a comprehensive set of listing options for Chinese unicorns of different sizes and development stages.

While the market outlook is promising, Mr. Au emphasized that macro-economic factors including continuous capital outflow into the U.S. resulting from the tax reform and interest rate hikes, escalating trade clash between the U.S. and China, as well as the ongoing Brexit negotiations can take a toll on investment sentiment and market stability, especially Hong Kong is an open market.

The line of IPO applicants for A-share issuance has shortened considerably to merely more than 300 companies over the year. However, given the continuous tighter review and scrutiny over IPO applications, Deloitte anticipates Mainland IPO activities slowing down for a quality growth with a forecast of around 180-240 companies raising approximately RMB170-200 billion. The existing pipeline suggests small and medium manufacturing and technology companies would dominate in terms of the number of upcoming new listings in the A-share IPO market.

Notes to editor:

Unless specified otherwise, all statistics were updated as at 31 March 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 31 March 2018.

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