Hong Kong’s IPO market is expected to improve over the next five years

BEIJING – Hong Kong’s IPO market will improve significantly over the next five years, starting in the second half of this year, George Chan, global IPO leader at EY, told CNBC in an interview on Wednesday.

“I think it will take a few years before we get back to the peak [in 2021] but the trend is there,” Chan said. ‘I see the light at the end of the tunnel.’

High U.S. interest rates, regulatory scrutiny, slower economic growth and tensions between the U.S. and China have limited Greater China’s IPOs over the past three years.

EY says in a report that while US IPO volume and proceeds rose significantly in the first half of 2024 compared to the same period a year ago, mainland China and Hong Kong saw a sharp decline in listings .

Many of the macro trends are now starting to reverse, which could support more IPOs in Hong Kong, said Chan, who lives in Shanghai.

“We are seeing a reversing trend,” he told CNBC. ‘We see this more and more often [U.S. dollar] funds, they move back to Hong Kong. The main reason is that Hong Kong has already taken these uncertainties into account.”

The Hang Seng Index is up more than 5% this year after four straight years of decline – which was the worst losing streak in the index’s history, according to Wind Information.

“Our HK cap markets team is very busy and has a strong pipeline for the second half. We expect to see a lot of HKSE listings,” Marcia Ellis, global co-chair of the private equity practice at Morrison Foerster in Hong Kong, said in a statement on Wednesday. an e-mail. .

Many companies that were waiting to list on mainland China’s A-share market have decided to switch to a Hong Kong stock exchange, she said. “Earlier [China Securities Regulatory Commission] approval slowed things down, but recently our team was able to get CSRC approvals pretty quickly.”

In June China new measures issued to promote risk capital, and authorities spoke publicly about supporting IPOs, especially in Hong Kong. Investors and analysts said they are now watching the pace of IPO approvals for signs of significant change.

Chan said another supporting factor for IPOs in Hong Kong is that many of the companies listed on the market are based in mainland China, where economic growth is “quite satisfactory.”

He expects that consumer companies could be among the near-term beneficiaries of the IPO.

“As the economy slowly recovers, many people in China are willing to spend,” he said, noting that this was especially the case in less developed parts of the country.

Official data at the national level shows that retail sales in China are growing more slowly – at just 3.7% in May compared to a year ago, compared to growth of almost 10% or more in previous years.

Also important for global asset allocation is that the US Federal Reserve and other major central banks are pulling back from aggressive rate hikes. High interest rates have made government bonds a more attractive investment than IPOs for many institutions.

“I would say that if rates can be lowered further, by perhaps 1%, that would have a significant impact on the IPO market,” Chan said.

IPOs in Hong Kong raised $1.5 billion in the first half of the year, down 34% from a year ago, EY said in a report published late last month. According to the report, the Hong Kong Stock Exchange saw nearly 100 or more IPOs per year in 2021 and 2020, raising tens of billions of dollars.

By comparison, IPOs in mainland China raised $4.6 billion in the first six months of 2024 – an 85% decline from the same period a year ago, according to EY.

Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Limited, said at a conference last week that the Hong Kong exchange has received 73 new exchange applications so far this year – a 50% increase compared to the second half of last year. She is not related to EY’s George Chan.

“The pipeline is growing nicely,” she said, noting that a total of about 110 IPOs are being considered for listing in Hong Kong. “All we need are good market conditions so that these things can come to market and be priced right,” she added.

“What we need is a strong pipeline,” says EY’s Chan. “We need an interested investor who has the money to invest, and we need good aftermarket performance.”

Hong Kong IPO returns are improving. The average first-day return of new listings on the Hong Kong stock exchange in the first half of 2024 was 24%, well above the average of 1% in the same period last year, EY said.

“The aftermarket performance of IPOs in Hong Kong is doing quite well compared to the past five years,” Chan said. “These things put together project an upward trend for the Hong Kong market [in the] next 5 years.”

Chan said he expects the number of deals to increase in the second half of 2024.

He said these will likely be mid-sized – between 2 billion Hong Kong dollars and 5 billion Hong Kong dollars ($260 million to $640 million) – but added that he expects better market momentum in 2025.

Slowing economic growth and geopolitical uncertainty have also weighed on early-stage investment in Chinese startups.

Total venture funding from foreign investors in Greater China deals fell to $19 billion in 2023 from $67 billion in 2021, according to alternative asset research firm Preqin.

U.S. investors have not participated in the largest deals in recent years, while investors from Greater China remained involved, the company said in a report last month.

As for US IPOs of China-based companies, EY’s Chan said he expects the current oversight of listings to be “temporary,” although data security rules would remain a hurdle.

In early 2023, the China Securities Regulatory Commission formalized new rules requiring domestic companies to comply with national security measures and the Personal Data Protection Law before going public abroad. A China-based company with more than 1 million users must pass Beijing’s cybersecurity assessment to be listed abroad.

“As time goes by, as people get to know the Chinese better [securities regulator] approval process and they are more comfortable with geopolitical tensions, which more large companies… would take into account [the] American market as the final destination,” said Chan.

“When the time comes, I think the institutional investors would be interested in these large Chinese companies because they actually want to make money.”

He declined to comment on specific IPOs, saying certain high-profile listing plans are “isolated incidents.”

Chinese taxi company Didi, which was delisted from New York in 2021, has denied reports that it plans to list in Hong Kong next year. Fast-fashion company Shein, which does most of its manufacturing in China, is trying to list in London after criticism from the US, according to a CNBC report.