Following an eventful year in both the macroeconomic and political situations across the globe, professional services organization Deloitte China's National Public Offering Group anticipates stock exchanges in Hong Kong and Shanghai to come first and second respectively ahead of New York in terms of the total initial public offering (IPO) funds raised at the end of 2016.
The global IPO market is to face uphill challenges in the year to come amid numerous factors particularly of the normalization of the U.S. monetary policy, leadership changes in several key countries, ongoing depreciation pressure on the Renminbi as well as Brexit’s further developments.
Despite a solid pipeline, Hong Kong's IPO fundraising capability especially for mega IPOs may come under pressure. The A-share IPO activities, on the contrary, are expected to accelerate to enable the long queue of pipeline to gain access to the capital market as long as the market environment is supportive.
By 31 December 2016, Hong Kong is expected to raise about HK$194.7 billion from 120 IPOs. They represent a reduction in both the proceeds raised and number of IPOs from HK$262.1 billion and 124 IPOs in 2015 by 26% and 3% respectively.
New listings from Chinese financial services institutions are to constitute about 70% of the total funds raised in the market, a jump from about 53% in 2015.
"Despite many worrying developments in particular the weakening Chinese economy earlier in the year, lingered uncertainty over the U.S. interest rate hike timetable and Brexit, Hong Kong can still support many large offerings boosted by optimistic news such as the European Central Bank's quantitative easing measure, improved Chinese economic performance over the course of the year and the anticipated Shenzhen-Hong Kong Stock Connect," said Edward Au, Co-Leader, National Public Offering Group, Deloitte China.
"We are excited that the market is getting further diversified with overseas and local companies taking up a heavier role in the IPO market this year. This has been reflected by the highest numbers of new listings this year from international companies and at the Growth Enterprise Market over the last decade respectively," continued Au.
The A-share market
The A-share market is expected to complete 233 IPOs raising RMB154.9 billion in 2016 with 28 IPOs estimated to debut between 20-31 December 2016. Compared against 219 IPOs raising RMB158.6 billion in 2015, the number of new listings is to see 6% up while proceeds are to move 2% down.
The Shanghai Stock Exchange is to continue to surpass the Shenzhen Stock Exchange by raising more funds from fewer IPOs, a trend that is sustained from last year.
"More IPOs on the Mainland were given the green light to offer in the market since the second half of the year as the Chinese economy recorded a better performance," commented Anthony Wu, Leader of China A-Share Capital Market of the National Public Offering Group at Deloitte China.
"Similar to its Hong Kong peers, in 2016, the A-share market is to have a significant share of the total funds raised in the market driven by Chinese financial services institutions."
The anxiety over the presidential elections and speculations over the interest rate hike in the U.S. have taken a toll on the IPO activities in the U.S. Both the New York Stock Exchange and NASDAQ saw a sharp cut in the number of new offerings and proceeds as compared with last year.
As a result, the crown jewels of IPO fundraising in 2016 is anticipated to go to Hong Kong which had more and larger IPOs. The Shanghai Stock Exchange is likely to follow with three huge prominent IPOs from the financial services industry while the New York Stock Exchange is likely to come third.
In 2017, while Chinese financial services institutions will hold center stage in Hong Kong's IPO market, life science and health care, aviation services, technology, media and communications and international companies are expected to attract the market spotlight as well. Their listings will be spurred by the capital reserve requirement, financial innovation, ongoing Chinese healthcare reform, booming of new economy stocks and strengthening of their competitiveness.
Draw attention of other Asian SMEs
Hong Kong's active market, international investor base and role as a mutual market in Asia, will also help draw small- and medium-sized enterprises (SMEs) from other Asia countries to list here.
"While it is encouraging to see four to five jumbo IPOs mostly from Chinese financial services firms and about 130 active IPO applications queueing up for 2017, we cannot ignore the macroeconomic and political outlook which is likely to result in a slow start to Hong Kong's IPO market in the first half of the year.
“Mainland IPO issuers, which still form a key part of Hong Kong's IPO market, are likely to have their bottom-line and fundraising capability hit harder by the slower economy and the likely depreciation of the Renminbi following the start of the U.S. interest rate rise cycle," said Au.
"The initiation of the Brexit process before end of March 2017 and uncertainty over political leadership changes in various countries especially the U.S. may weigh on Hong Kong's stock market as well."
Together with the prevalent trend of having more SMEs to go public after a wave of strong economic growth and listings of state-owned enterprises, Deloitte expects Hong Kong to have approximately 120-130 IPOs raising HK$160-180 billion for the entire 2017.
As for the A-share market, Deloitte forecasts it to complete approximately 380-420 IPOs raising RMB250-280 billion in 2017 backed by a possibility of a launch of about 38 approved IPOs next January and a pipeline of more than 600 companies waiting for listing review. The pace of IPO approvals since the second half of 2016 also indicates that more IPOs will be accelerated to the market in 2017.
Wu explained a few large offerings with proceeds exceeding more than RMB5 billion each are expected to come from the financial services sector and the investors will continue to eye on new listings from Chinese commercial banks. But in terms of number of IPOs, majority will still come from small- and medium-sized manufacturing and technology businesses, sustaining the trend of the past few years.
Both Au and Wu believe it still takes time for the full benefits of the enhanced Shanghai-Hong Kong Stock Connect and the newly launched Shenzhen-Hong Kong Stock Connect to IPO markets of Hong Kong and the Mainland to be realized especially when details of the proposed Primary Equity Connect have yet to be formulated.
But the valuation gaps among stock markets in Hong Kong, Shenzhen and Shanghai are likely to be narrowed gradually in the medium run.