Hong Kong’s IPO market is set to improve over the next five years

BEIJING — The marketplace for preliminary public choices in Hong Kong is about to enhance considerably over the following 5 years, beginning within the second half of this 12 months, George Chan, world IPO chief at EY, informed CNBC in an interview Wednesday.

“I feel it is going to take a pair years to return to the height [in 2021] however the development is there,” Chan stated. “I can see the sunshine on the finish of the tunnel.”

Excessive U.S. rates of interest, regulatory scrutiny, slower financial progress and U.S.-China tensions have constrained Higher China IPOs within the final three years.

EY stated in a report that whereas the amount of IPOs and proceeds within the U.S. elevated considerably within the first half of 2024 in comparison with the identical interval a 12 months in the past, mainland China and Hong Kong noticed a pointy decline in listings.

Most of the macro tendencies are actually beginning to flip round, which might help extra IPOs in Hong Kong, stated Chan, who is predicated in Shanghai.

“We’re seeing a reversing development,” he informed CNBC. “We’re seeing extra of those [U.S. dollar] funds, they’re shifting again to Hong Kong. The primary cause is that Hong Kong has already factored in these uncertainties.”

The Cling Seng Index is up greater than 5% year-to-date after 4 straight years of decline — which was the worst such dropping streak within the historical past of the index, in keeping with Wind Data.

“Our HK cap markets staff could be very busy and has a robust pipeline for H2.  We count on to see many HKSE listings,” Marcia Ellis, world co-chair of personal fairness follow at Morrison Foerster in Hong Kong, stated in an e mail Wednesday.

Many firms that have been ready for an inventory in mainland China’s A share market have determined to change to 1 in Hong Kong, she stated. “Beforehand [China Securities Regulatory Commission] approval was slowing issues down however lately our staff has gotten CSRC approvals fairly shortly.” 

In June, China issued new measures to advertise enterprise capital, and authorities spoke publicly about supporting IPOs, particularly in Hong Kong. Buyers and analysts stated they’re now wanting on the velocity of IPO approvals for indicators of a major change.

Chan stated one other supportive issue for Hong Kong IPOs is that lots of the firms listed out there are primarily based in mainland China, the place financial progress is “fairly passable.”

He expects shopper firms may very well be among the many near-term IPO beneficiaries.

“Because the financial system slowly recovers, lots of people in China are keen to spend,” he stated, noting that was particularly the case in much less developed components of the nation.

Official national-level knowledge have confirmed that retail gross sales are rising extra slowly in China — up by simply 3.7% in Could from a 12 months in the past versus progress of practically 10% or extra in prior years.

Additionally important for world asset allocation, the U.S. Federal Reserve and different main central banks are pulling again from aggressive rate of interest hikes. Excessive charges have made Treasury bonds a extra engaging funding for a lot of establishments as a substitute of IPOs.

“I’d say if the rate of interest could be additional minimize down, 1% possibly, that might have a major impact on the IPO market,” Chan stated.

Hong Kong IPOs raised $1.5 billion in the course of the first half of the 12 months, a 34% drop from a 12 months in the past, EY stated in a report launched late final month. Again in 2021 and 2020, the Hong Kong Inventory Alternate noticed practically 100 or extra IPOs a 12 months elevating tens of billions of {dollars}, in keeping with the report.

As compared, mainland China IPOs raised $4.6 billion within the first six months of 2024 — a drop of 85% from the year-ago interval, in keeping with EY.

Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Restricted, stated throughout a convention final week that to this point this 12 months, the Hong Kong alternate has obtained 73 new itemizing functions — a 50% enhance in comparison with the second half of final 12 months. She will not be associated to EY’s George Chan.

“The pipeline is increase properly,” she stated, noting about 110 IPOs in complete are in line for a Hong Kong itemizing. “All we’d like is a set of fine market circumstances so this stuff get to launch and value properly,” she added.

“What we’d like is a robust pipeline,” EY’s Chan stated. “We’d like an investor with the cash to speculate, and we’d like a superb aftermarket efficiency.”

Hong Kong IPO returns are enhancing. The common first-day return of latest listings on the Hong Kong inventory alternate within the first half of 2024 was 24%, excess of the common of 1% in the identical interval final 12 months, in keeping with EY.

“The aftermarket efficiency of Hong Kong IPOs has been doing fairly good in comparison with the previous 5 years,” Chan stated. “This stuff added collectively are projecting an upward development for the Hong Kong market [in the] subsequent 5 years.”

Chan stated he expects the variety of offers to choose up within the second half of 2024.

He stated these will possible be medium-sized — between 2 billion Hong Kong {dollars} to five billion Hong Kong {dollars} ($260 million to $640 million) — however added he expects higher market momentum in 2025.

Slowing financial progress and geopolitical uncertainty have additionally weighed on early-stage funding into Chinese language startups.

Whole enterprise funding from overseas traders into Higher China offers plunged to $19 billion in 2023, down from $67 billion in 2021, in keeping with Preqin, an alternate property analysis agency.

U.S. traders haven’t participated within the largest offers in recent times, whereas traders from Higher China have remained concerned, the agency stated in a report final month.

As for IPOs of China-based firms within the U.S., EY’s Chan stated he expects present scrutiny on the listings to be “short-term,” though knowledge safety guidelines would stay a hurdle.

In early 2023, the China Securities Regulatory Fee formalized new guidelines that require home firms to adjust to nationwide safety measures and the private knowledge safety regulation earlier than going public abroad. A China-based firm with greater than 1 million customers should go Beijing’s cybersecurity evaluation to listing abroad.

“As time goes on, when persons are extra acquainted with the Chinese language [securities regulator] approval course of and they’re extra turn into snug with geopolitical tensions, extra of the big firms … would take into account [the] U.S. market as their ultimate vacation spot,” Chan stated.

“When the time comes I feel the institutional traders could be thinking about these sizeable Chinese language firms, as they beautiful a lot need to become profitable.”

He declined to touch upon particular IPOs, and stated sure high-profile itemizing plans are “remoted incidents.”

Chinese language ride-hailing firm Didi, which delisted from New York in 2021, has denied studies it plans to listing in Hong Kong subsequent 12 months. Quick-fashion firm Shein, which does most of its manufacturing in China, is attempting to listing in London following criticism within the U.S., in keeping with a CNBC report.