Hong Kong IPO market seen to pick up in second quarter

25 companies expected to be listed in the second quarter with JGAAP recognition as a key highlight.

Hong Kong's IPO market is picking up in the second quarter and with this momentum around 25 companies are expected to complete their listings on the Stock Exchange of Hong Kong (the Exchange). During the period, one of the major developments is the recognition of Accounting Principles Generally Accepted in Japan (JGAAP) following the successful secondary listing of SBI Holdings, Inc (SBI, stock codes: HK: 6488, JP: 8473) on April 14, 2011 in the form of Hong Kong Depositary Receipts (HDRs), said professional services firm Deloitte Touch Tohmatsu (Deloitte).

Global initial public offering (IPO) issuance pulled back in the first quarter of 2011, particularly in the Asia Pacific region. Roiled by the crisis in Japan and political risk in the Middle East, the total funds raised in Asia Pacific dropped 53% year-on-year, to US$8.7 billion. However, market sentiment seems to be recovering gradually, especially in Hong Kong, which will remain as one of the most ideal IPO destinations for companies around the world, including those from Japan, according to a Deloitte report.

"We believe the IPO market in Hong Kong is picking up gradually," said Mr. Edward Au, National Co-Leader of Public Offering Group, Deloitte China. "Approximately 25 companies should be able to complete their listings on the Exchange in the second quarter[1]. These companies, mainly from the retail and consumer business sector[2], are keen to list in Hong Kong in order to further strengthen their business development on the Chinese Mainland. We believe the total number of IPO listings in Hong Kong will overtake that of last year." In 2010, 94 companies were listed on the Exchange's Main Board.

Deloitte cited the secondary listing of SBI as one of the highlights in the Hong Kong stock market. As the first Japanese company to have raised funds through HDRs, SBI helps promote the benefits of listing in Hong Kong, including access to the deep capital pool, not only at the time of listing, but also at the later stages from follow-on offerings. According to statistics from the Exchange, the total amount of follow-on offerings in the first quarter was HK$48.8 billion.

As the reporting accountant of SBI, Deloitte expects to see more Japanese companies, mainly from the retail and consumer sector, to be listed in Hong Kong by the end of this year.

"Although the market in Hong Kong carries an average lower price-to-earnings ratio of 16.5 times compared with the Tokyo Stock Exchange of 29.8 times, the abundant liquidity in the market, the higher valuation given to retailers and related extensive research coverage attract Japanese companies to list in Hong Kong," said Mr. Au.

"More importantly, listing in Hong Kong enables Japanese companies to broaden their Chinese shareholders' base and raise their company profiles in the Greater China region, where the current and prospective major market is. Not to mention, China is the second largest economy in the world," Mr. Au noted.

Deloitte said JGAAP is well recognized and accepted by international investors in Japan and the Eurozone. While the successful listing of SBI in Hong Kong has also marked the recognition of JGAAP, the Exchange's decision was granted only under certain conditions. Unless a specific wavier from the Exchange is obtained, Japanese companies that are seeking a secondary listing under JGAAP in Hong Kong will have to:

• include a summary of the material differences and a statement of the quantified financial effects of all material differences between JGAAP and International Financial Reporting Standards (IFRS) on certain key captions of the financial statements;
• present a timeframe on full adoption of IFRS-compliant financial statements; and,
• revert to IFRS or Hong Kong Financial Reporting Standards if it is no longer listed on Japan's stock exchanges.