In 2012, the deal flow and volume of the initial public offering (IPO) markets of Hong Kong and the Chinese Mainland are expected to see the weakest performance since the financial tsunami in 2009, despite recent improvement in the world's two largest economies, China and the U.S., in the fourth quarter (Q4), according to professional services organisation Deloitte Touche Tohmatsu.
While the Hong Kong IPO market may record a mild rebound in 2013 on the back of economic and regulatory policies from the two countries, the A-share market is likely to face a challenging outlook resulted from enhanced regulatory actions.
Liquidity Lifts Hong Kong
With 62 new listings raising HK$89.4 billion, Hong Kong is expected to close 2012 with the most lacklustre performance since 2009. The figures also represent a year-on-year decrease of 31% and 67% respectively from 90 listings and HK$271.4 billion in 2011.
About half of the proceeds raised in 2012 came from new listings in Q4, which were driven by the improved market sentiment and liquidity from economic stimulus programs of the U.S. Federal Reserve and the European Central Bank.
"Thanks to the recent mega listing of the People's Insurance Company (Group) of China Limited and other larger IPO deal, Hong Kong should be able to move up from the sixth position in June to become the fourth top global listing venue by end of 2012, in terms of IPO proceeds raised. It would then overtake the Shenzhen Stock Exchange and Bursa Malaysia, just behind the New York Stock Exchange, NASDAQ and Tokyo Stock Exchange," says Edward Au, Co-Leader of National Public Offering Group of Deloitte China.
Outlook Becomes More Certain
Hit by dampened investor confidence and waves of worsening corporate earnings announcements, the bearish performance of the A-share market has led to a significant slowdown in the IPO application review process.
As a result, this year's A-share IPO market is poised to see a record low in terms of deal flow and volume since the resumption of IPOs in the market in 2009. By the end of the year, the market is expected to have 154 new listings, raising RMB103.4 billion, a year-on-year decrease of 45% and 63% respectively.
"The optimistic economic indicators since the third quarter have yet alleviated the market's concern over China's economic outlook," analysed Anthony Wu, China A-Share Capital Market Leader of National Public Offering Group of Deloitte China. "As the market continued to adopt a wait-and-see attitude on the possible economic stimulus and directions following the successful transition of leadership in China and the Central Economic Work Conference, no IPOs have been launched since early November. The A-share market now has as many as 90 companies waiting to be listed though they have already passed the review offering meeting."
Divergent Trends in 2013
Looking ahead in 2013, Deloitte China believes Hong Kong's IPO leadership will be bolstered by the 'go global' strategy of Mainland companies and the 12th Five-Year Plan for Financial Sector Development and Reform, which will fuel businesses' financing needs through capital markets.
Companies in the infrastructure-related and retail and consumer sectors will also raise funds to seize opportunities brought by policies favourable to new urbanization and domestic demand.
Au remarks that Hong Kong's status as an international financial center would be underscored by two major changes, namely the relaxation of H-share listing requirements and the streamlining of its secondary listing procedures, which are likely to become effective in 2013.
The former would spur more small and medium-sized Mainland enterprises to list in Hong Kong, while the latter can further attract the IPOs of international companies in Hong Kong.
"Boosted by various initiatives expected to be launched as China's 12th Five-Year Plan enters the third year, Hong Kong has the potential to raise its profile again as one of the world's top three IPO markets in 2013. Overall speaking, the market will rebound moderately with 70-80 new listings raising around HK$100-150 billion. When compared with 2012, the deal flow and deal volume would be 13-29% and 12-68% higher respectively," says Au.
With the continuous market transformation and China's priority in stabilizing the quality of economic growth, Wu sees the two contrasting forces to drive the A-share market healthily in the long run.
In 2013, IPO activity and valuation would be stemmed by weak corporate earnings and tight market liquidity.
Wu, therefore, foresees that the number of new listings and proceeds raised by the end of 2013 will be 2.6% and 3% less respectively than those of this year.
About 150 new listings would raise proceeds of approximately RMB100 billion.
The priority sectors, such as cultural, agricultural, forestry, fishing and livestock industries, as well as the seven strategic emerging sectors, including manufacturing and new materials, will be the focus of A-share IPOs in the year 2013.
Looking into the longer run, Au believes the Hong Kong and Mainland markets would continue to integrate with each other. This is evident from the increasing convergence in the valuations of A shares and H shares.
"With its prominent role as an offshore Renmibi (RMB) market, Hong Kong will continue to actively support the internationalisation of the currency. Measures such as the relaxation of RMB qualified financial institutional investors scheme to Hong Kong institutes and the launch of RMB-denominated exchange traded funds tracking Hong Kong stocks are just the first steps. We anticipate there is a potential for the H-share listing requirements to be further relaxed, allowing these issuers to raise RMB in Hong Kong," Au concludes.