2019 Q1 Review and Outlook for the Chinese Mainland and Hong Kong's IPO Markets

The National Public Offering Group of Deloitte China released its the first quarter (Q1) of 2019 review and outlook for the Chinese Mainland and Hong Kong's initial public offering ("IPO") markets on 2 April. Findings indicate that uncertainty in Sino-U.S. trade conflict negotiations and Brexit affected worldwide IPO activities during Q1 of 2019. Hong Kong's stock exchange ranked second globally in terms of the IPO funds raised over Q1 2019 amid the reduced number and scale of new listings. Although new listings on the Mainland remained low due to strict regulatory requirements, stock exchanges in Shenzhen and Shanghai have surpassed other major bourses to occupy the third and fourth global positions.

Looking ahead, greater certainty in Sino-U.S. trade negotiations and Brexit in April will help boost the prospects of IPO markets by fueling the U.S. and Chinese economies, sentiment and liquidity towards new equities, and determining the overall capital flow. With the recent launch of acceptance and review of listing applications for the Sci-Tech Innovation Board, new listings are expected to flourish starting in the middle of second quarter. More new paths of listing and listing models evolving from the existing dual-listing (A+H) and NEEQ+H models may gradually emerge helping to expand the two capital markets, reinforce the status of Hong Kong as an international financial center and further internationalize the A-share capital market.

The statistics, in particular the absence of large, prominent deals and a drop in the listing applications, may suggest a weakening performance of Hong Kong's IPO market. But the market's ongoing resilience in attracting sufficient listings and liquidity could help the city remain in second place globally despite uncertainties in the two world's largest economies, especially given their close economic ties with Hong Kong. This performance clearly demonstrates Hong Kong's position as a leading international financial center.

The A-share market featured numerous IPOs from various city and agricultural commercial banks as well as securities firms which attracted liquidity. Deloitte expects similar additional listings to ease the downward pressure on the economy. A key Chinese government priority is to release more lending facilities from both larger and smaller banks to private enterprises, and small and micro businesses.

Given the lingering uncertain macro-economic and political situation in Q1, Deloitte maintains its forecast for the IPO activities of Hong Kong in 2019, i.e., about 200 IPOs raising at least HK$180 billion. Two potential new listings raising at least HK$10 billion each are considering offerings in the city. There remains a possibility of seeing one or two new listings from weight voting rights companies when the market sentiment and liquidity improves given a high threshold for market capitalization at the time of listing.

As for the A-share market, Deloitte expects about 110-150 new listings raising RMB140 billion-170 billion are to be completed on the Main Board, SME Board and ChiNext in 2019. Stability in IPO activities and quality in the IPO issuers would continue to be key priorities for listing application review for the first three markets. Another 90-110 IPOs may ultimately also be launched on the Sci-Tech Innovation Board.

The A shares have been enjoying a better valuation for a long while, which may be elevated further in the early launch of the new board. However, as the new board's issuer base expands, investors turn mature, and the A-share market becomes more internationalized over time, the gap between valuation for A shares and stocks in Hong Kong is expected to gradually draw nearer in the longer run. Ultimately, these new listing candidates are likely to base decision of listing destinations on their business development strategies and target investor base.