Hong Kong retains spot as world's top IPO market in first five months of 2016

Hong Kong’s stock market’s recent volatile run has seen it edging close to bear territory, triggered by uncertainties over mainland China’s economic growth and the state of the global economy.

Nonetheless, Hong Kong remains the world’s top market for initial public offerings (IPO) in terms of funds raised and number of listings in the first five months of this year.

This highlights Hong Kong’s leading position in the global capital markets, says Benson Wong, assurance partner at PwC Hong Kong. “The Hong Kong IPO sector is a fund-raising platform that is facing international markets and has mainland China’s backing. China is expected to maintain a growth rate of 6 to 7 per cent. This will boost the expansion of domestic enterprises. Their continuing demand for financing will also support Hong Kong’s IPO market.

“It is anticipated that the Shenzhen-Hong Kong Stock Connect will be launched this year and HKEX will have a profound impact on the Hong Kong stock market. This will strengthen the major role played by Hong Kong in [mainland] China’s multilayered capital markets.”

Edward Au, co-leader of national public offering group at Deloitte China, says that as of June 8, Hong Konghad raised HK$43.8 billion from 37 new listings, fuelled by three mega IPOs from Chinese financial services institutions.

“This is against 38 new listings raising HK$92.7 billion in the same period last year after all large new listings shrank across the board this year. The listing window in the first six months was disrupted by mixed expectations over the US interestrate hike, worries of an economic slowdown in China and outflow of capital from the emerging markets.

“The Chinese reserve requirement ratio cut, signs of the Chinese economy picking up, quantitative easing by the European Central Bank, potential inclusion of A-shares in the MSCI [Morgan Stanley Capital International] index, as well as the low likelihood of a US interest rate hike, helped lift the market in later months. However, the possibility of Britain opting out of the European Union has had a negative impact.

“The market outlook remains uncertain until decisions from the MSCI, Federal Reserve and Britain are made later in June. Market players are very cautious about additional investments. As such, we anticipate an uptick in the sentiment and appetite of Hong Kong’s IPO market in the second half of the year after six months of turbulence.”

Paul Lau, partner and head of capital markets advisory group at KPMG China, says since A-share IPOs resumed in November 2015, the number of new listings represent a small portion of companies queuing up for IPOs.

“Mainland companies with fund-raising requirements continue to look for ways to gain access to equity markets. The trend towards a reduction of debt levels across multiple sectors in China has intensified the needs among mainland China corporations, such as those in the financial services sector, to raise equity funding in the IPO markets.”

Lau believes capital markets reform measures, such as the registration-based system and multitier capital markets , will spur further developments. “With a more defined IPO timeline and greater access to international investors, the Hong Kong IPO market continues to be a priority for mainland companies seeking access to equity markets. Some Hong Kong listed companies have or are considering a listing in the A-share market to avail of more attractive valuation levels, either through privatisation in Hong Kong and a relisting on the mainland or via a spin-off transaction.

However, he warned that “The recent tightening of the vetting process may result in a reduced number of new listings, in particular for those applicants with smaller market capitalisation and looking for a GEM Board listing”.

Ringo Choi, EY’s Asia-Pacific IPO leader, expects Hong Kong’s IPO market to be more active for the rest of 2016. “The IPO pipeline remains rich. Companies in the Hong Kong Exchanges and Clearing IPO pipeline are waiting for a window to make their debut. Hong Kong stock market has rebounded since May and large IPOs are expected to be listed this year.

“The increasing expectation for Chinese yuan depreciation and the launch of Shenzhen-Hong Kong Stock Connect will attract safe haven flows from mainland China which may propel the stock market. The scheme is also expected to attract mainland companies to go public and raise money in Hong Kong and enhance the competitiveness of the Hong Kong market.”

However, there is high probability that global economic growth will remain muted, while China’s economy may follow an L-shaped path, Choi says. “As a reflection of the economy, investors will be more cautious on the stock market.”

From a regulatory perspective, the recent guidance letter from HKEX on IPO vetting and listing suitability helped clarify matters for listing applicants and relevant parties, Wong notes. “We expect to see more guidance, consultation papers and rule revisions in the near future in line with the latest developments, enhancing Hong Kong’s position as one of the key global financial centres.”

(SOUTH CHINA MORNING POST)