2018 Q1 Review and Outlook of the Chinese Mainland and Hong Kong's IPO Markets

The National Public Offering Group 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.

Driven by the active IPO activities at GEM, a record high number of IPOs took place in Hong Kong. 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.

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.

The current reform to Hong Kong's IPO regime, including the new listing requirements for the Main Board 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/ Chinese Depository Receipts (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.

After scoring a record high IPO performance in 2017, the A-share market made a slow start in the first quarter of 2018. This includes a higher rejection rate for applications, as well as the latest market consultations for the IPOs/ CDRs issuance for innovative Chinese businesses, indicates how the A-share market is still undergoing substantial reforms. At the same time, Deloitte is seeing improvement in the average offering size among IPOs and the number of companies awaiting IPO review. So it is 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.

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.