2018 1H Review and Outlook for the Chinese Mainland and Hong Kong IPO Markets
The National Public Offering Group released its latest insights on the initial public offering (IPO) markets of the Chinese Mainland and Hong Kong. In the first six months of 2018, new listing regimes and hot market expectations have given a strong boost to the share flotations of new economy companies in both markets, with some well-known Chinese unicorns set to start their flotations in July. These trends are likely to help raise the rankings of 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 could depend upon a more stable capital market amid emerging issues such as a stronger U.S. dollar, rising Sino-U.S. trade tensions, a weakening Chinese economy and a probable 'Gray Rhino' in the Eurozone outlook for the second half of the year.
In the first six months of 2018, Hong Kong's IPO market remained vibrant. The keen enthusiasm to go-public of small- and medium-sized enterprises was not dampened by a rise in the listing requirements for the Main Board and GEM, the reduction in the U.S. balance sheet or the trade clashes between the U.S. and China. The number of new listings for the first six months of 2018 and the second quarter alone achieved record highs. However, the strong domination of small- and medium-sized issuers also resulted in a further reduction in average deal size.
Deloitte's latest analysis indicates at least five IPOs, each raising upwards of HK$10 billion, related to the financial services, technology and consumer players with new economy business models, and about 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 for IPO under the new listing rules, education institutions and financial services companies. However, given its observation that the majority of candidates in the IPO application pipeline are small or medium in scale, Deloitte maintains its forecast of around 180 IPOs raising approximately HK$160-HK$190 billion in proceeds for this full year.
With the introduction of IPOs and Chinese Depository Receipts (CDRs) for innovative Chinese companies, as well as recent tighter listing application review guidance, the A-share market is transforming from a high volume IPO deal market to a quality-focused one. Since the beginning of 2018, the A-share market has maintained slow momentum, with fewer approved IPOs. More applications were rejected in the first six months of 2018 than in the whole 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 long run.
Given the limited number of innovative companies eligible to issue shares or CDRs, and as listing reviews remain tight, Deloitte anticipates Mainland IPO activity in the second half of 2018 to be similar to the first half. We forecast that 120-160 companies will raise approximately RMB170-200 billion for the full year. The vast number of small and medium-sized manufacturing, and technology and retail companies in the listing application queue indicates they will dominate the number of upcoming new listings in the A-share IPO market over the rest of the year.