Shares of Chinese artificial intelligence company SenseTime Group have climbed as much as 150% since it debuted on the Hong Kong Stock Exchange (SEHK) in late December, lifting market confidence despite recent government clampdowns on other Chinese companies.
Nevertheless, market participants still remain cautious on the Hong Kong IPO market in general, given its lag in returns when compared to the world’s major stock markets.
“Given the poor performance of so many HK IPOs in the past six to 12 months, and given the issues around China tech, it is good to see that the IPO has actually performed well since December 30,” said a US-based securities expert who did not want to be named.
“US investors remain very agnostic or negative regarding China and Hong Kong IPOs. Although I think the details [regarding] China's blueprint for allowing IPOs overseas and even including Variable Interest Entity (VIE) structures seem positive, investor feedback is mixed as they are not sure what the final version will look like and what it means in practice,” he told AsianInvestor.
He believes most investors will wait around to see if any promising companies apply for overseas listings, and if China actually allows them to do so. “Given the changes in Hong Kong itself, investors do not think that a Hong Kong listing will [have the same value] or get the same valuation as a US market listing,” he said.
In the third quarter of last year, IPOs in Hong Kong raised more than $35 billion, up 28% compared with the same period the previous year, according to a KPMG report. By contrast, NASDAQ and New York bourse fundraisings have jumped 97% to about $115.8 billion.
“We realised that that there are some signs of decreasing fund raising and cases. I think one of the reasons is the annual performance of the Hong Kong equity market in general which is actually not very ideal, unlike some of the other Asian markets like Taiwan and Vietnam, which has an impact on the incentive of IPO candidates who are particularly from China,” said Andy Wong, IPO leader at SW Hong Kong.
“But SenseTime’s share price performance is very encouraging, and demonstrates to the whole world that Hong Kong could still be a good choice for companies thinking of ‘going home’ [instead of going to] the US,” he added.
Ultimately, Wong believes that a number of Chinese firms will reconsider listing in the US and come to Hong Kong first, with their next step being the A-shares market.
Listing at home is not without its regulatory risks. “The uncertainty of China’s regulatory [mandates] on a number of different industries will have multiple impacts. Companies will be thinking whether they are suitable for a Hong Kong listing and must take the risk of having a delayed timetable before IPO. Valuation is also another concern,” Wong said.
Jason Lui, head of East Asia strategy at BNP Paribas, believes Hong Kong funds inflow could see some pick-up this year.
“We see two additional catalysts driving the sentiment of the sector for 2022, including the pace of “homecoming” of China ADRs to Hong Kong, and the potential inclusion of dual-listed companies into the list of eligible securities for Southbound investors, both of which could provide additional sources of fund flow for the sector in Hong Kong,” he told AsianInvestor.
But Lui noted that valuation concerns needed to be dealt with first. “As measured by the Southbound Stock Connect flows, we estimate that Mainland Chinese investors have net-bought about $900 million worth of four large-cap tech companies listed in Hong Kong since the beginning of 2022. Due to their depressed valuations, the Chinese tech companies may be more sensitive to China-specific policy changes than the rise in USD interest rate,” he added.
“In terms of tech stocks, we are in favour of the corporates in the downstream supply chain, particularly those with strong market presence in Apple products such as AirPods and iWatch, which offer decent industry growth. The long-term metaverse theme is also on our radar, which is expected to sustain in the coming five to 10 years,” said a BEA Union Investment spokesperson.
The asset manager is positive on the outlook of the AI industry and believes there is major growth potential for the sector — although liquidity and valuations still need to be taken into account.
“We are closely monitoring the market development, and will only select stocks with high corporate quality and reasonable valuation,” the spokesperson from BEA Union Investment said.