Unimpressive Hong Kong Keeps No. 3 Spot In Global IPO Race

Key Takeaways:

• Hong Kong IPOs fell sharply last year, but the fundraising is expected to rebound this year as global inflation moderates and China reopens
• The fading threat of forced de-listings for Chinese companies in New York could have a negative impact on Hong Kong IPOs this year

By Emily Chan

Last year wasn’t kind to global stock markets, which were rocked by Russia’s invasion of Ukraine and resulting energy shortages in Europe. Ruthless interest rate hikes by the U.S. Federal Reserve to tame inflation, and repeated outbreaks of the Covid-19 epidemic in China, didn’t help either.

That confluence of factors not only hit corporate valuations, but also put a major damper on initial public offerings (IPO). In strong contrast to the global picture, China’s two main stock markets in Shanghai and Shenzhen continued to host a steady stream of new listings that propelled them to the top of the global IPO list in 2022. Hong Kong got a lift as well, since it is also a major hosting ground for Chinese companies.

On a global basis, the number of IPOs worldwide plunged 45% last year to just 1,333, according to Ernst & Young. Funds raised fell by an even steeper 61% to just $179.5 billion. While U.S. fundraising fell more than 90%, dropping the Nasdaq and New York Stock Exchange to 9th and 11th places, respectively, the Shanghai and Shenzhen stock exchanges finished first and second by raising $52.7 billion and $28.8 billion, respectively, according to KPMG.

After a slow start in the first half of the year, with only 27 new IPOs raising HK$19.73 billion ($2.53 billion), Hong Kong made a comeback in the second half. Things kicked off in July with a major listing by Tianqi Lithium (9696.HK; 002466.SZ), which raised HK$13.5 billion; followed by CTG Duty Free (1880.HK), which raised HK$18.4 billion in August; and CALB Co. (3931.HK), which raised HK$10.1 billion in October.

Sentiment further improved with a late-year stock market rally, bringing Hong Kong’s total IPOs for the second half of last year to 63, raising a total of HK$84.84 billion.

When all was said in done, Hong Kong was the world’s third-biggest IPO market last year with 90 new listings, raising HK$104.57 billion. Nevertheless, the number of new listings was down 8.9% from 2021, and the amount of funds raised fell by a much larger 68%, with up to 35 IPOs falling on their debuts.

IPO industries also changed from domination by large tech and biotech stocks in recent years, to stocks from more traditional industries like retailing and consumer goods, as well as the new materials and services sectors.

Hong Kong also got a boost from its growing profile as a “safe port” alternative to the U.S., which has become a stormy place for Chinese stocks over the past two years. Some 11 U.S.-listed Chinese companies made second listings in Hong Kong last year, including Nio Inc. NIO, KE Holdings BEKE, OneConnect Financial Technology OCFT, Tencent Music TME, Boss Zhipin BZand Kingsoft Cloud KC.

Bullish on 2023

While 2022 was decidedly downbeat, observers are more bullish on 2023. Many believe the U.S. Fed will slow down its interest rate hikes, and China’s long-awaited reopening could bring new life to the world’s second-largest economy. Such factors could lead to a recovery of the global IPO market. As that happens, Hong Kong could host around 110 IPOs this year, raising approximately HK$230 billion, according to a forecast by Deloitte.

KPMG also expects market sentiment to rebound, prompting companies to restart listings that got delayed. It estimated Hong Kong will host at least 90 IPOs this year, raising a total of HK$180 billion. PricewaterhouseCoopers and Ernst & Young also forecast a similar annual fundraising of HK$200 billion, showing the big four global accountancies are all quite optimistic about Hong Kong this year.

The market expects at least 10 companies to raise more than $1 billion in Hong Kong IPOs this year, including Alibaba’s BABA Ant Group affiliate, Amer Sports of ANTA Sports (2020.HK), and Hong Kong insurer FWD Group.

While the global macro situation looks set to benefit Hong Kong, the city could also get a boost on the policy front. The Chinese securities regulator said in September it would promote the inclusion of Hong Kong-listed foreign companies in a program that lets mainland Chinese buy Hong Kong-listed stocks. It said it is also exploring the possibility of allowing mainland-based investors to use China’s currency, the yuan, to purchase Hong Kong stocks through the connect program.

In anticipation of such changes, the Hong Kong Stock Exchange has launched a “dual tranche, dual counter” that allows trading in both yuan- and Hong Kong dollar-denominated securities. It hopes the move will attract more dual currency stocks to list in Hong Kong.

In addition, Hong Kong is preparing a June launch for a fast interface for new issuance (FINI) platform, which was approved last July and aims to simplify and digitize the IPO process by shortening settlement cycles for IPO subscriptions.

The Hong Kong Stock Exchange also plans to modify listing rules to lower the thresholds for five “cutting-edge tech industries,” including information technology, hardware, advanced materials, new energy and energy conservation and environmental protection. The new rules are expected to be implemented in the first quarter after a consultation period ended in in December, adding another booster to the IPO market.

New attraction from U.S. 

Kenny Wen, KGI Asia’s head of investment strategy, is cautiously optimistic about the Hong Kong IPO market this year as conditions improve and attract large companies to launch offerings.

However, he pointed out that controversy plaguing U.S.-listed Chinese stocks for the past two or three years has recently eased with the signing of a new agreement between the U.S. and Chinese securities regulators in August. The latest positive signal came last month after the U.S. Public Company Accounting Oversight Board (PCAOB) sent staff to Hong Kong for a site visit and declared it was able to gain complete access to the accounting records it was seeking in its review of U.S.-listed Chinese companies. With the risk of de-listing in the U.S. now much lower, many U.S.-listed Chinese firms may shelve plans to make second listings in Hong Kong.

Reflecting that, Wen pointed to a recent report saying e-commerce giant Pinduoduo PDD and trucking services provider Full Truck Alliance YMM had shelved Hong Kong listing plans. Other companies may also shelve similar contingency plans, and unlisted companies that were considering Hong Kong IPOs could also now reconsider potentially doing such listings in the U.S. as well, especially from the internet sector that has traditionally favored New York.