Robust IPO market ahead for Hong Kong

Despite uncertain macro-economic outlook.

Based on the latest analysis of the new share markets of Hong Kong and the Chinese Mainland by the National Public Offering Group of Deloitte China, stock exchanges from Hong Kong, Shenzhen and Shanghai overtook that of New York to be amongst the top five initial public offering (IPO) bourses based on the proceeds raised in the first three months of 2016.

According to a release from Deloitte, looking ahead, while Hong Kong is likely to move further ahead driven by a strong pipeline of companies going public and support from the Chinese government to encourage more Mainland firms to list here, bourses in Shenzhen and Shanghai are expected to see slower activity as compared to the same period last year given the ongoing deepening reform in the Chinese Mainland’s capital market.

As at 31 March 2016, Hong Kong has completed 19 new listings raising about HK$28.0 billion, 24% down from the 25 IPOs but 47% up from HK$19 billion in proceeds over the same quarter of last year. The IPO funds were largely boosted by two large H-share flotations from Chinese banks completed before the end of March.

“Various events including the Chinese economic slowdown, strong concern about another U.S. interest rate hike and outflow of capital from the emerging markets have put pressure on Hong Kong’s stock market including IPO activities during the first two months of the quarter,” said Mr. Edward Au, Co-Leader of the National Public Offering Group, Deloitte China.

“But the market got excited by encouraging developments such as the Chinese reserve requirement ratio cut, anticipation over measures to be released after ‘Two Sessions’ as well as further quantitative easing by the European Central Bank, whetting the appetite for new share offering activities in March.”

Looking across the border, the Shenzhen market overtook Shanghai with both more new listings and funds raised. The former had 15 firms going public with proceeds of HK$7.8 billion (RMB6.6 billion) while the latter saw nine companies raising HK$6.0 billion (RMB5.1 billion) from share flotation in the latter. These figures represent a total of 24 IPOs raising RMB11.7 billion in the Ashare market in the first quarter of 2016.

“Following a restart of IPO activities in November 2015, new share offerings on the A-share market in 2016 have not been as heated as they were during the same period last year. This was due to the control over the pace and price of new listing and a volatile market,” said Mr. Anthony Wu, Leader of the A-Share Capital Market at the National Public Offering Group of Deloitte China.

While the U.S. IPO market was hit hard by a volatile U.S. stock market, the funds raised in Hong Kong, Shenzhen and Shanghai all exceeded proceeds from New York and NASDAQ in the first quarter for the first time. Hong Kong continued to top the global IPO race, followed by London and then Tokyo. Shenzhen took fourth place with Shanghai at the fifth position.

Here's more from Deloitte:

In the remaining three quarters of 2016, a strong pipeline of companies planning to list in Hong Kong, a long line of companies awaiting Chinese IPO review and support from the Chinese regulator to have Mainland firms to continue to list in Hong Kong are setting the stage for a promising market outlook amid uncertain economic factors such as the anticipation over an interest rate rise in the U.S., and a likelihood of a slowdown of growth in the Chinese economy for another few months. The slower-than-expected launch of the registration-based regime for A-share IPOs makes Hong Kong’s IPO market more attractive to Chinese Mainland firms as well.

“The Chinese government’s commitment to reform state-owned enterprises (SOEs) and the financial market are spurring SOEs and financial services institutions to flock to Hong Kong. Environmentally friendly and healthcare and pharmaceutical companies are two other key themes of this year’s IPO market under the government’s plan of developing the former into one of the major pillar sectors and reforming the care, insurance and medicine within the latter. As such, Deloitte reaffirms that Hong Kong to record 115-125 IPOs raising approximately HK$260 billion by end of this year,” Mr. Au elaborated.

This year, the Chinese market spotlight will focus on developing a multi-tier market, including the reform in one of its over-the-counter markets, the National Equities Exchange and Quotations, which will be split into two tiers. This may create direct competition with ChiNext in Shenzhen. With an introduction timeline of two years from March 2016 and the anticipated heavy preparation work required to enhance the mechanism, the new share registration-based regime is unlikely to be launched this year.

Mr. Wu added that the IPO review and offering pace in this quarter suggests that fewer IPOs are to be debuted by the end of 2016. This translates into 180-220 new listings on the Chinese Mainland raising approximately RMB106.0 billion at most. In terms of the number of new offerings, small and medium-sized manufacturing and technology firms are likely to dominate.