The volume of IPOs and funds raised in Hong Kong ensured it continued to rank number 1 globally in 1H 2016, according to PwC.
Due to pressure from slowing economic growth in China and weak economic recovery globally, combined with uncertainty over the UK referendum to exit the European Union (EU) and the pace of US interest rate hikes, overall market sentiment had been less than ideal.
However, IPO activities in Hong Kong continued their stellar performance in comparison to the London Stock Exchange in second place (total funds raised HK$31.6 billion) and the New York Stock Exchange in third place (total funds raised HK$28.8 billion), attesting to the firm leading position that Hong Kong continues to hold in global capital markets.
PwC anticipates more buoyancy in IPO activity in Hong Kong for the second half of 2016, especially in Q4 - the traditional peak season for IPO listings. Hong Kong’s fundraising market looks poised to take the top spot in the world.
In the first half of this year, there were a total of 40 new listings in Hong Kong, a 22% decrease compared to the same period last year. Total funds raised reached HK$43.5 billion - a 66% decline year on year.
The main cause stemmed from global economic uncertainty, which dragged down overall fundraising through IPOs. Added to this, volatility in China’s stock market earlier this year prompted investors and companies planning to list in Hong Kong to adopt a wait-and-see attitude, thereby affecting IPO investment sentiment and pricing, causing the Hong Kong IPO market to fall back in 1H 2016.
“Although there were some market fluctuations in Hong Kong in Q1, it improved in Q2. In 1H 2016, most IPOs on the Main Board were financial services companies, followed by retail, consumer goods and services, as well as industrial products,” says Eddie Wong, Partner of Capital Markets Services, PwC Hong Kong.
Financial services lead the race
With regard to funds raised in new listings, IPOs of financial services companies continued to lead the race, making up 84% of total funds raised on the Main Board. This reflects the fact that many mainland banks and financial institutions continued to actively pursue optimal timing to list in Hong Kong in order to raise capital and meet future development needs.
“Based on this, we expect listings in Hong Kong for 2016 to continue their focus on financial services, with the chance of seeing a mega-IPO raising over HK$50 billion. The trend of financial services leading ahead is expected to extend from 2015 well through the whole of 2016,” says Wong.
PwC estimates 130 new IPOs in the whole of 2016. However, total fundraising is forecast to fall from the HK$300 billion projected earlier this year to HK$220-250 billion, reflecting the impact of fundraising size reductions or changes in listing plans by large IPO projects.
However, PwC remains confident about Hong Kong’s IPO market in the second half – it is expected that total funds raised by IPOs in 2016 may enable Hong Kong to take the top spot worldwide.
”The UK’s decision to exit the EU may increase volatility in the global economy and cause investors to become more risk-averse,” says Benson Wong, Assurance Partner, PwC Hong Kong. “But, as Hong Kong IPO activity has relied on mainland enterprises in the past few years, the impact of external factors is relatively mild compared to other international stock exchanges.
“As a result, we foresee that there will be little change in the number of businesses interested in going public in Hong Kong, but uncertainties in the global economy may continue to affect the possibility, pricing and performance of upcoming IPO launches. Due to the impacts of Brexit, we believe there is much less chance of a US rate hike this year, and it will have limited impact on the Hong Kong IPO market.”
In spite of economic slowdown in the mainland, China is still expected to maintain a medium to high growth rate of 6-7% and continue to boost the expansion of domestic enterprises, as well as demand for financing.
PwC expects the Shenzhen-Hong Kong Stock Connect tp bring about profound and positive effects on both the China and Hong Kong stock markets if launched in the second half of this year. It would further reinforce the significant role of Hong Kong in the mainland’s multi-layered capital markets and its advantageous position as a fundraising platform facing the international markets with the backing of China.
Mainland markets slow down
Looking at mainland markets, the volume of A-share IPOs and funds raised in 1H 2016 dropped significantly compared to the same period last year. There were a total of 61 new listings and total funds raised reached RMB28.8 billion, declining 67% and 80% respectively year on year. These reflect the policy uncertainties in the mainland capital markets which caused volatility in the A-share market during the first half of this year.
Coupled with stricter reviewing of listing proposals and terms by regulatory authorities, the rate of IPO launches in mainland markets has been slowing down. PwC expects the volume of IPOs in the second half will be similar to that in the first half of the year, with 120 new listings and total funds raised at RMB60-80 billion for full year 2016.
Eddie Wong notes that, given the increasingly complementary trading platforms in China and Hong Kong, PwC expects Chinese companies to remain keen to list in Hong Kong. In particular, domestic enterprises with developed, mature businesses hoping to reach more overseas investors may list in Hong Kong as red chips or H-shares.
“Due to the considerable listing queue in the mainland, we believe that some of these companies may choose Hong Kong as a listing destination where timelines can be more easily managed. This will sustain the trend for Chinese enterprises listing in Hong Kong,” adds Eddie Wong.
With regard to market supervision in Hong Kong, Hong Kong Exchanges and Clearing (HKEx) recently issued a guidance letter on IPO vetting and suitability for listing. The Securities & Futures Commission of Hong Kong (SFC) and HKEx also jointly published a consultation paper on listing regulations, which PwC supports.
PwC expects to see further issuances of guidance relating to IPO applications and assessments, as well as consultation papers and clause amendment proposals in the near future that will meet the latest developments and needs of listing companies, clarify requirements on listing applicants and related organizations, and speed up listing review processes.
“The regulators stated earlier that they were looking into launching a new listing platform for innovative sectors such as financial technology, and will be publishing related proposals and consultation papers on this.
“We are open to this and hope that related measures can optimize listing review efficiencies, as well as simplify listing procedures to draw in more quality enterprises to raise capital in Hong Kong, thereby elevating Hong Kong’s competitiveness in the global financial and capital markets,” says Benson Wong.