Market Views: Will HK still be home to Chinese IPOs?

IPO listings volume in Hong Kong have had a lacklustre year compared with global peers, so will more Chinese companies embrace HK as a listing option after what happened to Didi Global?
Market Views: Will HK still be home to Chinese IPOs?

The slow down in Hong Kong initial public offering listings reflects concerns about how, and when, Chinese tech stocks will be able to win back investor confidence - and get approval from regulators to sell shares overseas - following the dire Didi Global and Ant Group headlines.

The Chinese ride hailing giant Didi Global’s plan to delist from the New York Stock Exchange and go back to the Hong Kong bourse caused trillions in losses for investors and came amid growing regulatory pressure.

Jittery markets are now hesitant about the outlook for other Chinese tech stocks.

This week, SenseTime, a Chinese artificial intelligence company specialising in facial recognition, is seeking a $740 million to $770 million IPO in Hong Kong. Previously, however, it had been looking to raise $1 billion to $2 billion, according to media reports.

The shrinking fund-raising size also reflected investor concerns over Chinese stocks, testing market demand and confidence after the events of Ant Group and Evergrande.

However, this needs to be seen within an overall context of growth. In the third quarter this year, IPOs in Hong Kong raised more than $35 billion, up 28% compared with the same period last year, according to a KPMG report. Even so, NASDAQ and New York bourses fundraisings by comparison have jumped 97% to about $115.8 billion.

Source: KPMG

TMT, industrials and healthcare, life sciences are the top sectors, contributing over 69% of total funds raised in the US, HK and A-share IPO market. As of the end of September, the HK bourse has secured as much as $288 billion funds from 73 deals.

Source: KPMG

Debates have been ongoing as to whether the Hong Kong bourse will at some point benefit from China’s regulatory clampdown on technology companies, pushing some names back to Hong Kong from overseas bourses.

AsianInvestor invited asset managers and consultants to give us their outlook for the Hong Kong IPO market and Chinese tech stocks.

The following responses have been edited for brevity and clarity. 

Alan Wang, portfolio manager
Principal Global Equities

Chinese ADRs tanked over concerns they would not be able to get listed in Hong Kong in time, with 200+ pending IPOs queuing up for HKEx listing.

We believe VIE company regulations were a loophole for decades and this wakeup call is a positive change for minority shareholders’ interests. Hong Kong is well positioned for a three-year boom of “homecoming” IPOs.

HK Exchange is a structural beneficiary of IPO-related income, higher trading volume and higher velocity. MSCI China indices are switching constituents from US ADRs into HK-listed shares to adapt to shareholder profile and trading volume changes, which is helping this trend. As one of the leading managers of institutional funds and Hong Kong mandatory pension funds (MPF), Principal has already switched holdings from ADRs into HK-listed shares for more efficient intraday management.

Key things to watch include CSRC’s impending decision on overseas listing vetting for companies adopting VIE structure and cybersecurity rules for companies considering Hong Kong IPOs. It could also take some time for capital market counsels and investment bank sponsors to determine feasibility and advise on listing applicants’ compliance. Rectifications will be needed once the rules are finalised.

Andy Wong, IPO leader
SW Hong Kong

Hong Kong and the US have always been the top offshore listing platforms for mainland Chinese companies that sought to build diverse shareholder bases and raise funds in currencies other than the yuan for international expansion.

Accordingly, it is expected that the Hong Kong market will be in favour of more capital inflow.

However, both delisting in the US and China’s tightened regulation for firms seeking IPOs back in Hong Kong, it's not surprising that many medium-sized Chinese companies, especially technology-based business that were previously listed or thinking about US IPOs - will begin to consider Hong Kong as their preferred fund-raising platform.

Despite this, firms may encounter potential valuation discount issues when seeking secondary listing in Hong Kong.

Leveraging its advantageous geographic location, particularly its close proximity to mainland China, Hong Kong’s role in the fast-growing Greater Bay Area (GBA) will be crucial. Chinese innovative technology companies may pick Hong Kong as their top priority for listing as they are well-positioned to grow their business in the GBA and Hong Kong environs, gaining access to and tapping into Hong Kong’s capital market to raise funds from international investors, Chinese investors as well as local investors.

Raghu Narain, head of investment banking, Asia Pacific
Natixis CIB

The Hong Kong Stock Exchange represents a growing opportunity set for companies that want to delist from the US and relist in Hong Kong. Investor appetite in Hong Kong and the broader Apac region remains strong for quality issuers. From a context and time zone perspective, it is also interesting for Chinese stocks to be listed in Hong Kong rather than the US.

Hong Kong has a robust policy regime to attract new issuers and balance the needs of Investors as well. Depth and liquidity in the market also remains strong. All of this bodes well for attracting companies to list in Hong Kong.

Companies that have a strong nexus to China are always interesting for Hong Kong listings. Business models related to Chinese consumer trends, and going forward digital infrastructure, the new economy (healthcare and renewables), and with a sound ESG context, are all sectors and business propositions that will attract investors in Hong Kong.

Paul Lau, partner 

Market sentiment has remained strong amid ample liquidity from an improving economic outlook in major economies. With healthy pipelines in the US, HK and A-share IPO markets, we believe the global IPO market will remain active for the rest of the year. 

Hong Kong is in an advantageous position to attract more homecomings, reinforcing its role as the fundraising hub since these listings will allow issuers to expand their investor base and also to mitigate market risks.

Also, the dual primary listings of two US-listed Chinese electric-vehicle makers has set the precedent for similar companies to follow suit, suggesting an alternative listing route for homecoming listings to secondary listings.

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