Mainland’s clampdown on IPOs likely to boost listings in Hong Kong

Amongst Chinese companies to be slated in the Hong Kong Stock Exchange is Alibaba’s logistics arm.

In August 2023, China began to curb initial public offerings to ensure market stability, a move seen by experts as an opportunity for Hong Kong to hit a turnaround point.

“It has been recently observed that there are increasingly more IPO candidates [in Hong Kong] coming from the Mainland,” Andy Wong, IPO leader and PRC-HK business coordination partner at SHINEWING (HK) CPA Limited, told Hong Kong Business.

Wong said these firms initially came to fundraise in the Shanghai Stock Exchange (SSE) or the Shenzhen Stock Exchange (SZSE), but are now switching to Hong Kong for IPO recently.

 “It is likely that those ready IPO candidates will submit their application in the first half of 2024. So, we are expecting that the turnaround point [of the Hong Kong IPO market] is still in the second half of 2024,” he asserted.

Since the August clampdown in the Mainland, Hong Kong has seen the listing of Chinese companies such as Tian Tu Capital, a private equity company, as well as Alibaba’s logistics arm, Cainiao Smart Logistics Network, which filed for a US$1-b IPO in the Hong Kong Stock Exchange (HKEX).

Chinese battery manufacturer, Hebei Gellec New Energy Science & Technology Co., has also reportedly scrapped plans to list in the Mainland and file for an IPO in Hong Kong instead.

Meanwhile, China’s biggest ride-hailing company, Didi Global, is also reportedly planning to list its shares on the HKEX in 2024.

Three measures

Apart from China’s clampdown on listings, Wong believes three measures implemented by the Hong Kong government will help boost the attractiveness of the city’s IPO market.

One of these measures is the regime exempting innovative or specialist technology companies from existing financial eligibility tests under the Listing Rule.

According to Wong, a specialist technology company had already filed its application at the end of August. “Hopefully, the case can be approved for listing by the end of the year,” Wong said.

He also believes that the formation of a task force to ensure stock market liquidity will improve the city’s entire capital market.  The task force is chaired by Carlson Tong, the former chairman of Hong Kong’s Securities and Futures Commission (SFC).

The last measure which Wong thinks will help improve the IPO situation in Hong Kong is the proposed listing reforms to the Growth Enterprise Market (GEM) Board in which consultation ends in early November.

If the proposal gets a greenlight, GEM Board companies will be able to directly transfer to the Mainboard under the condition that they fulfill the Mainboard listing requirements.

Pricing

Hong Kong’s ability to increase pricing will help improve IPO sentiment, said EY Asia-Pacific IPO leader Ringo Choi.

Choi underscored that pricing is currently what makes Hong Kong a less attractive market for IPOs.

Hong Kong’s IPO proceeds plunged 60% in 2023 through mid-November compared to a year earlier to HK$41.3b, with 61 companies listing on the exchange, a 19% drop, according to EY. That was the lowest level for IPO activity in the last 20 years, EY said.

“When you compare an IPO in Asia versus Hong Kong, or a US IPO versus Hong Kong, the pricing of a Hong Kong IPO in general is on the lower side. Also, after one or two months, the liquidity of the Hong Kong market seems to die down or slow down faster than the other markets,” Choi said.

“Pricing is related to the quality of companies. Hong Kong will need to find ways to get good IPOs from other markets or from sectors which are extremely strong in Hong Kong. For example, Hong Kong is famous for its property market. If Hong Kong [is able to attract more] property companies it will affect the market a lot,” he said.

Growth areas

Choi, however, said that the property sector might take a backseat from the IPO scene in Hong Kong, given liquidity issues.

What he sees as areas of growth in the Asia-Pacific IPO market, including Hong Kong’s, are AI-related companies and biotech and pharmaceutical related businesses.

Energy efficiency companies or companies engaged in ESG or carbon neutrality businesses will also likely be the focus of investments in 2024, added Choi.

Wong shared a similar sentiment, adding that AI-related companies will be of most interest to investors next year. New economy sectors like life sciences and biological industries are also hot candidates, he said.

IPO success

The experts point out that the success of IPOs does not depend solely on the sector to which the company belongs, especially at a time when interest rates remain high.

For companies to bring valuations to a more realistic level, Choi suggested a down round, adding that many companies listing in the US have already done so.

 Expounding on a down round, Choi explained that it happens when companies are going public at a price lower than the valuations they achieved in previous private funding rounds.

“If the fund manager allows their company or their portfolio company to have a down round, they can match the reality of the present situation of the IPO markets,” he said.

Choi added that having a down round in that scenario could help boost the number, volume, and proceeds of an IPO “significantly” because the valuation of companies would be more aligned with market expectations, helping stoke potential demand for those deals.