Mainland capital market continues its steady growth, reform and internationalization

Published: 23 September 2019

Amid various macro uncertainties and market volatility, stock exchanges in Hong Kong, Shanghai and Shenzhen are expected to rank from 3rd to 5th in the global initial public offering (IPO) fundraising ranking for the first three quarters of 2019, according to the latest research by Deloitte China's National Public Offering Group (the Group). The first two places are expected to be taken by the New York Stock Exchange and NASDAQ, mainly due to their larger technology offerings.

Given several mega offerings, which have been given the green light to list, are waiting to start their roadshows, and the solid pipeline of listing applicants with the Hong Kong Stock Exchange, the Group believes Hong Kong remains well-positioned to meet its IPO fundraising forecast of at least HKD180 billion by the end of 2019. This forecast assumes the capital market can stabilize and warm up following some key macro-economic events, including the Sino-US trade talks set for early October.

In the Mainland, the final quarter of 2019 will see the launch of a new component index for the Shanghai Stock Exchange (SSE) Sci-Tech InnovAtion BoaRd (STAR), and further reform of the registration-based regime, including its introduction to ChiNext. The successful debuts of Shanghai-London Stock Connect and the STAR Market, and the inclusion of A shares into more international indices earlier this year, should create a capital market with greater diversity and connectivity with its global counterparts.

Market information indicates that Hong Kong will have had 98 new listings raising approximately HKD124.8 billion by 30 September 2019. Both figures would be much lower than they were in the same period of 2018 (down 38 percent and 49 percent respectively) when 158 IPOs raised HKD242.7 billion.

The return of a jumbo offering from Asia's largest beer company in late September could help Hong Kong move up from its 4th-placed position in the global ranking at end-August 2019.

"Developments and uncertainties in the Sino-US trade war, Brexit and other geopolitical factors caused global capital markets including Hong Kong to tumble during the first three quarters this year. This has deterred the listing plans of larger issuers, which require stable markets for book-building and deal completion. Also, market valuations usually become thinner during volatile times. This has resulted in no new listings of weighted voting rights (WVR) companies so far this year, whereas two WVR IPOs lured a huge pool of funds in 2018. A WVR listing requires a market capitalization of at least HKD10 billion. It is no surprise that overall IPO funds raised dwindled this year," says Edward Au, co-leader of the National Public Offering Group.

The Mainland IPO market was more active, and is expected to end the third quarter with 127 new listings having raised RMB140.1 billion (HKD154.9 billion). This represents a 46 percent increase in the number of IPOs from 87 in the same period of 2018 and a 20 percent increase in funds raised from RMB116.3 billion (HKD140.7 billion). The Shanghai Stock Exchange continues to lead in number of new listings and proceeds raised, with 74 IPOs expected to have generated RMB88.6 billion (HKD100.7 billion) by the end of the third quarter. Shenzhen trails with an expected 53 IPOs raising about RMB51.5 billion (HKD58.6 billion).

"The new SSE STAR Market is a milestone for the Mainland capital market. Its establishment focuses on high-tech sectors and the introduction of a trial registration-based regime, and its market-oriented pricing mechanism is transformational. Its 33 new listings, raising about RMB47.2 billion (HK$53.3 billion), is the main reason for the stronger performance of the A-share and Shanghai IPO markets. Indeed, one of the STAR listings was the 2nd largest Mainland IPO year to-date," says Anthony Wu, A-Share Capital Market leader of the National Public Offering Group.

The US IPO market for Chinese businesses continues to trend downwards. It is expected to have seen 21 new listings raising USD2.9 billion (HKD22.7 billion) by end-September 2019. In the same period last year, 27 new listings raised USD7.4 billion (HKD58.3 billion). This indicates a 22 percent year-on-year drop in number of IPOs, 61 percent decline in overall funds raised, and a 50 percent fall in average fundraising size. The absence of large new listings by technology and internet companies, uncertainties around the trade war and outlook for the US economy, and anticipation of the launch of the STAR Market, attributed to this year's weaker figures.

Deloitte is positive about signs for the Hong Kong IPO market from late August 2019, including the number of listing applications, publication of post hearing information packs and the resumption of global offering plans in Hong Kong shelved by some big listing candidates. As of 20 September 2019, the number of listing applicants has risen to more than 200, from just over 180 at the end of 1H2019.

"Coupled with the existing offering of the Asian beer company, IPO market momentum is likely to pick up further in the last quarter. If these deals, which include overseas companies from diverse sectors, are completed, they will solidify Hong Kong's role as an international financial center for companies of different sizes, sectors and jurisdictions. This role is a crucial one and will be a central element of the Greater Bay Area initiative in the long run," says Dick Kay, co-leader of the National Public Offering Group.

Edward Au notes that application trends indicate many potential issuers, including small and mid-cap companies, will strive to list before the end of this year or early next year, therefore need to file their listing applications by September at the latest. He anticipates a more exciting IPO market in Hong Kong during the 4th quarter, underpinned by more positive news on trade negotiations, Brexit and the potential of more economic stimulus measures from China. 

Back across the border, there is likely to be an even stronger focus on the STAR Market over the rest of this year. A new component index containing its existing stocks could be launched in October. This could drive the number of listings on the STAR market to 80-100 new economy companies by the end of 2019, with RMB100-125 billion in funds raised. Deloitte also expects 110-130 companies to have listed on the other three markets—the Main Board, SME Board and ChiNext—by the end of the year, contributing at least RMB120 billion.

"We are pleased to see the steady performance of the new board, which is well supported by the market-driven pricing mechanism. Regulators also sent strong messages on strict review practices for every China market including the new board. These developments will give the market more confidence. We expect several unicorns, or large cap, new economy companies, to debut on the STAR Market during the last quarter," adds Anthony Wu.

As Hong Kong continues to seek listings from international companies and provide more Asia-Pacific investment exposure, it should attract Chinese new economy companies with large market caps, strong fundraising needs and international ambitions.

"China is the world's second largest economy and a huge emerging market.  New economy companies, including unicorns, are growing at an exponential rate. A single market would be incapable of fully meeting the scale of these businesses' demands and their enormous fundraising plans.  

There are excellent opportunities for the two capital markets to more closely complement and supplement each other in the long run, supporting the healthy growth of the economy and these businesses," Au concludes.

Notes to editors:

Unless specified otherwise, all statistics are updated with our estimates and analysis as at 30 September 2019.

Sources for HK IPO statistics: the Stock Exchange of Hong Kong, Deloitte estimates and analysis, assuming the completion of five IPOs on the Main Board (MB) and GEM from 25-30 September 2019, each priced at the mid-point of their indicative ranges; excludes GEM to MB listing transfers, and proceeds from the exercise of offer size adjustment option from a MB listing, as well as over-allotment options by issuers newly listed on the MB in September 2019, which may complete by 30 September 2019.

Sources for A-share IPO statistics: the China Securities Regulatory Commission, Deloitte estimates and analysis, assuming the completion of six IPOs from 23-30 September 2019 with proceeds of each IPO calculated in accordance with the offering price that was announced.