Shanghai-Hong Kong stock connect, Party and economic meetings to excite Hong Kong and Mainland IPO markets in fourth quarter

Published: 5 October 2014

In the first three quarters of 2014, Hong Kong saw an influx of initial public offerings (IPOs) while IPO activities over the Chinese Mainland remained weak compared with the same period in 2012, a time before new listings were suspended, according to the latest analysis on the two IPO markets by National Public Offering Group of professional services organization Deloitte Touche Tohmatsu. Amid the expectation to end the third quantitative-easing campaign in late October and various ongoing economic and geopolitical risks, the launch of the Shanghai-Hong Kong Stock Connect Programme (the Programme), the Fourth Plenary Session of the 18th Communist Party of China Central Committee (CPCCC) as well as the annual Central Economic Work Conference are expected to stimulate flotation of shares in both markets in the last quarter.

As at 30 September 2014, excluding the transfer of listings from Growth Enterprise Market to  the Main Board, Hong Kong recorded 83 IPOs raising HK$131.3 billion, 93% and 117% up respectively from 43 new listings raising HK$60.6 billion in the first three quarters of 2013. The number of IPOs over the first three quarters hit a record high over the last decade.

"This is the most robust performance after 2011 when HK$206.9 billion were raised over the period spurred by a few international listings. Despite the fact that Hong Kong's stock market was affected by a number of geopolitical risks such as the Ukrainian and Middle East crises, the slowdown of major Eurozone economies and weaker macro data in August, the much-anticipated launch of the Programme offset the negative impact of these events," commented Mr. Edward Au, Co-Leader, National Public Offering Group of Deloitte China.

"However, the concentrated offerings from June to August diluted interest in individual IPOs. As a result, only about 72% of the IPOs listed on the Main Board were oversubscribed in this first three quarters against 80% of the same period last year. There were offerings cutting their fundraising scale as well. As a few major IPO indicators improved in September, we look forward to seeing more well-received IPOs, especially following the launch of the Programme," said Mr. Au.

Deloitte expects Hong Kong to close 2014 with about 110 IPOs raising at least HK$170 billion.  IPO activities in the fourth quarter are to be taken to peak by a strong IPO pipeline, the continuous deepening reform across many key sectors on the Mainland and state-owned enterprises, and policies of improving per capita income of Chinese citizens.

This is evident in the IPO applications published by Hong Kong Stock Exchange as at end of September. Forty-four applications were actively processed and half of them were Mainland business. Another 11 applications had approvals in principle granted in September with some expected to be listed in October. Property, consumer and manufacturing companies were the top sectors that these applicants came from.

Although Hong Kong's stock market turned volatile recently following the current political event in Hong Kong, the impact is expected to be short-run. Upcoming Chinese economic data, potential macro policies from the Fourth Plenary Session of the 18th CPCCC and the annual Central Economic Work Conference, effectiveness of the measures for containing the Mainland's local debt issue and lowering gearing, and an increased expectation over interest rate hike in the U.S. are stronger key factors that will influence the sentiment towards IPO activities.

When elaborating how the Programme, which does not cover new listings for the time being, can drive the outlook of Hong Kong IPO market in the next quarter, Mr. Au said the inflow of additional liquidity may help fuel the listings of four to five large to mega offerings in the pipeline and a long-awaited Renminbi IPO in the last quarter. In the medium run, he looks forward to a re-rated market with more international listings in Hong Kong.

By end of September, Hong Kong Stock Exchange came fourth in terms of IPO funds raised among major stock exchanges globally after the New York Stock Exchange, London Stock Exchange and NASDAQ. On the assumption that there will be no major events impacting the stock markets significantly in the fourth quarter, the existing IPO pipeline would enable Hong Kong to compete with NASDAQ for the world's third top IPO venue for 2014 in terms of proceeds raised.

As for the A-shares, 81 companies completed their IPOs by end of this third quarter raising RMB50.6 billion against 149 IPOs raising RMB100.2 billion over the first three quarters in 2012 before IPOs were suspended. The number of IPOs and funds raised were 46% and 50% down respectively.

Thirty-seven new issuers were listed on ChiNext while both the Main Board of Shanghai and SME Board in Shenzhen saw 22 new listings over the three quarters. Majority of the IPOs came from the technology, media and telecommunications (TMT), manufacturing and retail and consumer businesses.

"Due to the ongoing IPO reform, small and medium-sized IPOs dominated the A-share market over the first three quarters. The average deal size was RMB625 million while those for Main Board, SME Board and ChiNext were RMB1 billion, RMB519 million and RMB464 million respectively. The figures dropped across the board over the same period in 2012. To date, there were merely 10 IPOs that were sized over RMB 1 billion and jumbo IPO was not recorded," analysed Mr. Anthony Wu, China A-Share Capital Market Leader of the National Public Offering Group at Deloitte China.

Since the resumption of meeting of the Public Offering Review Committee of the China Securities Regulatory Commission (CSRC) in April, 56 out of 66 applicants passed the meetings but eight were rejected and two withdrew their applications afterwards. Forty-four companies were given the approval documents to go ahead to list since June with 24 IPOs now waiting in the wings. Together with the CSRC's plan of putting about 100 firms to public from June to end of the year and an average number of new listings for each month, Deloitte forecasts the A-share market to have 50-60 IPOs raising about RMB25-35 billion in the last quarter. TMT, manufacturing and consumer companies will contribute to most of these upcoming listings, which will be mainly small and medium in size.

Mr. Wu anticipates the Programme to enable more inflow of liquidity and strengthen the A-share market further, which will be able to support the high IPO volume in the fourth quarter. In the long run, he believed this will facilitate the IPO regime reform leading to an earlier introduction of the widely-anticipated registration-based regime.    

Notes to editor:
Unless specified otherwise, all statistics were updated as of 30 September 2014. However, statistics on the number of companies under Chinese IPO review were updated on 25 September 2014.

All proceeds included funds raised from the selling of old shares during an IPO.

Sources of the statistics for the Hong Kong IPO market: Hong Kong Stock Exchange, Deloitte estimate and analysis; exclude the transfer of listings from Growth Enterprise Board to the Main Board and 3 newly-listed companies that have yet announced their stabilization actions as of 30 September 2014.  

Sources of the statistics for the A-share IPO market: CSRC, Deloitte estimate and analysis.