Mainland and Hong Kong IPOs to accelerate if pandemic situation on Mainland improves and Russia-Ukraine conflict subsides in Q2 2022
- Full implementation of registration-based regime would stimulate Mainland IPO activity in later part of 2022
- Recent COVID-19 outbreak could hurt Mainland businesses and listing valuations
- Outlook for Hong Kong's market to be heavily influenced by US tapering and interest rate hikes and the Russia-Ukraine conflict
- China concept stocks to continue to seek listings in alternative markets, especially Hong Kong, to mitigate delisting risks
Published: 1 April 2022
The Capital Market Services Group of Deloitte China today released its Q1 2022 analysis and outlook for the performance of Chinese Mainland and Hong Kong initial public offering (IPO) markets.
The Shanghai Stock Exchange emerged to become the world's largest IPO venue by funds raised in Q1 2022, following the listings of three prominent IPOs. Shenzhen Stock Exchange took 3rd place with a large IPO that became one of the world's 10 largest listings. The Korea Stock Exchange, Saudi Exchange, and NASDAQ took 2nd, 4th, and 5th positions respectively, with each having mega flotations including the world's largest IPO by an electronic vehicle battery company.
In Q1 2022, unlike its peer Hong Kong, the Mainland's new listing market faced less direct, huge impact from major macro-economic and geopolitical events, including US tapering and interest rate hikes and the Russia-Ukraine conflict. If these uncertainties, particularly the pandemic and events in Ukraine, subside in Q2, the Chinese market should perform more strongly, in particular if the registration-based IPO system is extended to the main boards in Shanghai and Shenzhen within the year.
In the three months to 31 March 2022, the Beijing, Shanghai, and Shenzhen stock exchanges hosted 85 IPOs raising RMB179.9 billion, against 100 new listings raising RMB76.1 billion in Shanghai and Shenzhen in Q1 2021. Although the number of deals fell by 15%, proceeds rose sharply by 136% due to a return jumbo listing by a telecommunications company. The majority of the proceeds, RMB116.6 billion from 37 IPOs, were raised in Shanghai, and Shenzhen markets recorded the most IPOs (41 IPOs raising RMB62.1 billion). Beijing Stock Exchange had seven new listings that raised about RMB1.2 billion.
"Although the A-share market has been affected by major macro-economic and geopolitical events to a certain extent, the total number of IPO deals in the market was reduced over the period. But we are very pleased to see the Shanghai Stock Exchange and Shenzhen Stock Exchange take the global lead in IPOs by becoming the largest and 3rd biggest listing destinations by funds raised. The return listing of a telecommunications company became the world's 2nd largest IPO in Q1 2022 and another three listings ranked in the top 10 IPOs globally. This is truly a remarkable result for the A-share market in Q1 2022 amid great volatility and uncertainties in global stock markets," says Tong Chuan Jiang, A-Share Offering leader, Capital Market Services Group, Deloitte China.
On the other hand, US tapering and interest rate hikes and the Russia-Ukraine conflict exacted a toll on Hong Kong capital market in Q1 2022, resulting in a slow IPO market. These international developments pushed up energy and commodity prices, reduced market liquidity, and squeezed valuations. This has affected the schedules of some of the larger, significant listings. However, if the Russia-Ukraine conflict in particular can be amicably subsided in Q2 2022, the existing strong pipeline of more than 130 listing applications with the Stock Exchange of Hong Kong suggests investors' appetite could rebound strongly and the IPO window could open wider. Listings from technology, media, and telecommunications (TMT), life sciences and healthcare (LSHC), and environmental, social and governance (ESG) themed companies are set to be the highlights.
The Hong Kong market had 15 IPOs raising HKD13.6 billion in Q1 2022, with proceeds down 90% from HKD132.8 billion in the same period of 2021 and the number of listings down 53% from 32. There was only one large listing from a manufacturing company.
"The Hong Kong stock market started to plunge in early February 2022 due to speculation and worry about US interest rate rises and tapering and the Russia-Ukraine conflict. The 5th wave of the pandemic cut back much of local business activity, further weighing on the performance of the IPO market. But we are confident momentum could pick up swiftly once some of the negative, temporary developments are improved or removed," says Dick Kay, Offering Services leader, Capital Market Services Group, Deloitte China.
In the US, the implementation of the Holding Foreign Companies Accountable Act dealt a blow to the IPO market for Chinese companies in Q1 2022. Only one Chinese listing candidate, from the medical device sector, went public, raising USD39.4 million, compared to 20 Chinese businesses that commenced trading in Q1 2021 raising a combined USD4.37 billion.
"We are looking forward to the consent on audit oversight to be reached by regulators of the two countries on the back of ongoing positive discussions. This will help bolster investors' confidence towards China concept stocks and eventually help resume IPO activities for Chinese businesses in the US. However, we also believe many China concept stocks will continue to seek alternative listing platforms, particularly in Hong Kong, to help divest their investment risks for longer term benefits," adds Allen Lau, National leader, Capital Market Services Group, Deloitte China.
The SSE STAR Market, ChiNext, and Beijing Stock Exchange are set to remain the growth engine of the country's IPO market development in 2022 in terms of their combined number of deals. The SSE STAR Market could have 170-200 listings raising RMB210 billion-RMB250 billion in 2022, with 210-240 new listings raising about RMB160 billion-RMB180 billion on ChiNext. The main boards in Shanghai and Shenzhen should have about 120-150 IPOs raising RMB200 billion-RMB230 billion. Small and medium-sized manufacturing, technology, and LSHC companies will dominate the number of new listings.
"The full implementation of the registration mechanism for all markets on the Mainland will help expand the market further, with more large listings raising between RMB1 billion and RMB5 billion, within 2022. Listings by TMT and LSHC companies are set to grow. The proportions of the number of IPOs from these two sectors grew in Q1 2022 as compared with the same period of last year," concludes Tong.
The Capital Market Services Group predicts Hong Kong will have about 120 listings raising about HKD330 billion in 2022, although the Russia-Ukraine conflict and Mainland’s recent pandemic outbreak pose uncertainties to the listing windows and performance and valuations of the Mainland businesses respectively. Return listings of China concept stocks will be the key theme, with IPOs from TMT, LSHC, and ESG companies the spotlights. Over time, the market will host more diverse in industries and businesses.
"The Hong Kong capital market has many strong, proven fundamentals and leading edges that enable it to pick up much quicker than peers once adverse market conditions like the Russia-Ukraine conflict ease. On top of observing how tapering and interest rates rises go in the US, we need to watch how the business and valuations of Mainland companies are being affected by the recent outbreak," says Edward Au, Southern Region managing partner, Deloitte China.
"However, most important of all is that the Hong Kong's ecosystem for nurturing new economy companies continues to mature. This will help drive technology and innovative companies, especially China concept stocks, to continue to flock to Hong Kong, regardless of the evolution of the lingering Sino-US geopolitical tension and outcome of the cross-border audit oversight discussions. This ecosystem will provide a strong backbone for Hong Kong's new economy IPOs, listings of special purpose acquisition companies (SPACs), and de-SPAC transactions," adds Au.
Hong Kong welcomed its 1st SPAC listing in Q1 2022, which raised HKD1 billion. Looking ahead, the market is expected to see up to 20 SPAC listings to complete in 2022, each raising at least HKD1 billion. Factors including whether the first de-SPAC transaction is announced and/or completed in 2022 will be critical in determining the outlook for this market segment on top of macro-economic and geopolitical factors.
Notes to editors:
Unless specified otherwise, all statistics are updated with our estimates and analysis as of 31 March 2022.
Sources for A-share IPO statistics: the China Securities Regulatory Commission, Shanghai Stock Exchange, Shenzhen Stock Exchange, Beijing Stock Exchange, Deloitte estimates and analysis; excludes transfers from the Select Tier of National Equities Exchange and Quotations to Beijing Stock Exchange.
Sources for Hong Kong IPO statistics: the Stock Exchange of Hong Kong, Deloitte estimates and analysis; excludes GEM to MB transfers and SPAC listings.
Sources for US IPO (Chinese companies) statistics: New York Stock Exchange, Nasdaq, Bloomberg, and Deloitte analysis.