The Mainland regulator's support for initial public offering (IPO) activities will enable stock exchanges in Shanghai and then Shenzhen to remain ahead of the Hong Kong Stock Exchange while lagging behind the New York Stock Exchange in terms of IPO funds raised as at the end of the first six months in 2017, according to Deloitte China.
Though Hong Kong's long application list suggests a resilient IPO market for the remainder of the year and the last quarter is the traditional peak season for its new listings, the city is likely to continue to trail New York due to both fewer huge offerings and the smaller scale of IPOs in the pipeline.
By 30 June 2017, Hong Kong is expected to have 69 new listings raising approximately HK$53.8 billion, a 77% jump from 39 IPOs and 23% up from HK$43.6 billion during the first half of last year. Despite just three large IPOs, the market has been vibrant in terms of small and medium-sized deals which saw a sharp rise in the first six months of the year as compared with last year.
Strong enthusiasm among SMEs
"The enthusiasm of going public on the Growth Enterprise Market (GEM) in Hong Kong among the local small and medium-sized enterprises was strong,” notes Edward Au, Co-Leader, National Public Offering Group of Deloitte China. “This can be demonstrated from both the actual number of new listings and applications for listing on the GEM surpassing those of the Main Board (MB) by the end of the first half of 2017."
Au adds that the number of new listing from the GEM in this first half is the highest since the establishment of this board in 1999.
“The IPO pipeline also suggests that this trend would prevail for the remainder of the year despite the launch of the consultation on a review of the GEM and changes to GEM Listing Rules,” says Au.
At the same time, large offerings were slowed by the U.S. interest rate hikes, elections in Europe and uncertainties in the Eurozone especially related to the Brexit negotiation, in the first six months, according to Au.
As for the Mainland market, both the number of new listings and IPO funds raised are anticipated to rise more than three times from 61 IPOs raising RMB28.8 billion in the same period last year to an estimated 252 IPOs raising RMB127.6 billion by 30 June 2017.
So far, Shanghai's Main Board has been the most active market, followed by ChiNext, a trend that has unfolded since the first quarter of this year.
Boosted by regulatory support
"The IPO activities on the Chinese Mainland were considerably boosted by regulatory support. We are excited to see new listings in the first six months of this year are to exceed the number of offerings for all of 2016. This is also going to be of one of the best performances in this market since the same period of 2011," remarked Anthony Wu, A-Share Capital Market Leader of the National Public Offering Group, Deloitte China.
Though fewer new listings were recorded in June, Wu noted that the number of IPO applicants was reduced considerably to approximately 550 currently. He is optimistic that it will take 12 to 14 months at the least for all of the candidate to get listed.
As for the global IPO proceeds race, the New York Stock Exchange maintained the crown position with three huge offerings including Snap Inc. and an improved market sentiment following the new U.S. administration that commenced office at the beginning of the year. Both Shanghai and Shenzhen outplaced Hong Kong in the rankings, each with far more number of IPOs.
By the end of 2017, Deloitte anticipates Hong Kong to record about 140-150 new listings raising approximately HK$150 billion. This will be helped by another two to three large offerings from financial services institutions and technology companies and more than 140 active IPO applications.
In addition, the more favorable developments of the US Federal Reserve, the economic environment of the Eurozone and the Chinese economy will be conducive to new listings.
Strong international investor base
Some Southeast Asia companies especially those that are to be benefited from the Belt and Road Initiative and are valued lower within their home countries will find Hong Kong attractive with its strong international investor base and high liquidity. Most of these companies will come from the infrastructure and consumer/retail businesses.
Au adds that for Hong Kong to sustain its success as a financial hub and mutual market for Asia, it is critical to strengthen its financing capability and innovative service offerings for companies of different sizes across different sectors and jurisdictions. This includes a need to create a listing platform for high-potential, fast booming companies that are unable to currently list on Hong Kong’s two existing markets.
At the same time, Hong Kong has to seize the opportunities from the co-operations at the Guangdong-Hong Kong-Macao Bay Area in order to lure more capital into the market. Looking into the long run, the entire framework will help more larger offerings to complete in Hong Kong.
As for the IPO forecast of the Mainland, Deloitte projects the market to launch about 420-480 IPOs raising at least RMB260 billion by the end of the year. This represents a slowdown in IPO activities in terms of number of new listings during the second half of the year.
At the same time, the funds raised will grow due to two to three large IPOs from real estate companies and financial services institutions.
Small- and medium-sized offerings from manufacturing and technology companies will continue to dominate in terms of the number of new listings.
Wu concludes that the impact of MSCI's inclusion of A shares, which will only commence formal operation next June, will only be seen in the longer term rather than in the immediate future. That inclusion will eventually reduce the valuation gap between A shares and H shares.