This is a four-part series of thematic predictions for 2024. This is the first story.
Hong Kong’s initial public offering (IPO) market is expected to show gradual signs of recovery in 2024, driven by China’s economic recovery and a possible interest rate cut in the United States, industry players said.
Other positive factors include Hong Kong’s closer ties with the Middle East, some potential spin-off listings of large Chinese companies, and IPOs of large growth companies in semiconductor, new energy, and consumer markets.
In 2023, the global IPO markets raised $131.1 billion across 1,371 deals, representing a decrease of 33% in total fundraising and a 10% drop in the number of IPOs compared with 2022. The US stock exchanges were among the few to record improvements in IPO activities.
Hong Kong’s IPO market concluded the year with 70 IPOs that raised HK$46.3 billion ($5.9 billion), a 56% slump as compared to 2022, extending the market's fundraising decline to three consecutive years since 2021, marking the lowest fundraising total in 20 years.
KPMG estimates the market to rebound in 2024 and raise HK$100 billion ($12.8 billion) through about 90 IPOs, reclaiming its top-five global IPO ranking, and up from the sixth in 2023. Similarly, PwC forecasts 80 companies will be listed in Hong Kong in 2024, to raise HK$100 billion.
“The market confidence in China’s economic recovery, and expectations on stable and market-favourable stimulus are the key drivers of the Hong Kong IPO market,” said Christopher Wong, head of Asia Pacific equity capital markets at BNP Paribas.
He noted that many investors hope to see stable improvement in economic data, solutions to the property crisis, and an end to clampdowns on specific sectors.
“The market is expecting a bigger push for more significant stimulus policies to address the structural changes in China to bring back investor interest before we see the IPO market active again,” Wong told AsianInvestor.
“As for external factors, a decline in US interest rates this year will also be helpful, so we may see more activities in the second half.”
SECTORS TO WATCH
He said investors will keep an eye on high-profile Chinese companies that have already filed their applications, such as Alibaba’s logistics arm Cainiao, shipping company SF Express, and electrical appliance manufacturer Midea.
Meanwhile, key sectors that align with China’s initiatives and consumption pattern will be the focus for 2024.
These include companies under energy transition themes, such as new energy vehicle (NEV) value chains, energy storage, on the back of supportive government policies and investors’ preference for ESG-theme investments.
Low-price consumer companies, especially tea or coffee and restaurant chains, are on the rise given changes in consumer spending habits, Wong noted.
Other sectors to watch include artificial intelligence (AI), such as biotech and drug discovery, advanced driver-assistance system, technology, media and telecommunications (TMT) companies backed by AI technology, and life sciences, consumer healthcare.
Echoing Wong’s remarks, Irene Chu, partner and Hong Kong head of new economy and life sciences at KPMG China, expected companies in sectors such as semiconductor, new energy, and EV to support Hong Kong IPOs in 2024.
They could go public under Hong Kong’s new specialist technology companies listing regime, which is designated for both commercial and pre-profit growth companies.
KPMG expected about five such companies to debut this year, raising HK$5-10 billion per deal.
Hong Kong equities, together with Chinese equities, underperformed in 2023. The Hang Seng Index concluded the year with a 13.8% decrease to pre-2010 levels at 17,047 points, while the Tech Index was down 8.8%.
“We are currently at the 10-year valuation trough in Hong Kong, and the most depressed valuation compared to indices of other developed exchanges,” BNP Paribas’s Wong noted.
“With the macro uncertainties, there may not be a drastic improvement this year, but new policy support, decreasing US interest rates, and uplift in corporate earnings will help with recovery in valuations,” he said.
The IPO market is an important channel for asset owners to exit private market investments, while creating opportunities to build new stock positions in high-quality companies. It is also a useful indicator for stock investors to gauge the overall market sentiment.
With the possibility of a rate cut in the US this year, PwC expected capital from Europe, US, and the Middle East to return to Asia, increasing market liquidity and improving valuations.
Although investors will continue to be cautious about investments in China, BNP Paribas’s Wong said he sees “good interest” from the Middle East in certain sectors, such as new energy, EV, healthcare, and tech, while a lot of Chinese companies are keen to seek Middle East funding.
“While Middle East investors do sometimes participate in Chinese companies’ IPOs, we see more interest in private situations, such as PIPE (private investment in public equity), and pre-IPO placements,” he said.
The Stock Exchange of Hong Kong recently added Saudi Arabia as a recognised stock exchange to foster secondary listings from the Middle East.
“We are yet to see that trend coming as more time is needed to introduce the advantages of the Hong Kong stock market to Middle East issuers and [for them to] get comfortable with the gaps between the two venues, such as cultural and requirement differences,” he said.
Noting that Middle East countries are eager for investment opportunities in high-tech companies, KPMG’s Chu believes that if the performance of specialist technology companies’ IPOs are in line with expectations, then these are projects that Middle East investors will be interested in.
Given the downsizing of the IPO market and foreign fund outflow, Wong expected Chinese institutions to contribute to Hong Kong IPOs to a larger extent than other investors.
However, as Chinese investors are experiencing structural changes in the economy, they will also be cautious with IPO investments, especially if a lock-up is required for cornerstones.
“But quality companies, preferably leaders, in favourable sectors will definitely be a priority,” he said.