Hong Kong’s IPO market set to grow over the next five years

BEIJING – The market for initial society options in Hong Kong is set to grow substantially over the next five years, beginning in the second half of this year, George Chan, EY’s global IPO head, told CNBC in an interview on Wednesday.

“I think it will take a few years to get back to the peak (in 2021), but the trend is there,” Chan said. “I can see the light at the end of the tunnel.”

High US interest rates, regulatory scrutiny, slow economic growth and US-China tensions have hampered Haier China IPOs over the past three years.

IPO volume and earnings in the US were significantly higher in the first half of 2024 compared with the same period a year earlier, EY said in a record, with listings in mainland China and Hong Kong seeing a clear decline.

Most macro trends are now starting to turn around, which will support more IPOs in Hong Kong, said Chan, who is based in Shanghai.

“We are seeing a reversal trend,” he advised CNBC. “We are seeing more of these (US dollar) funds going back to Hong Kong. The main reason is that Hong Kong has already taken these uncertainties into account.”

Understand Seng Index It’s up more than 5% year-to-date and today reversed a four-year low — the worst decline in the index’s history, according to Breeze data.

“Our HK cap markets team is very busy and has a strong pipeline for H2. We expect to see many HKSE listings,” Marcia Ellis, global co-chair of the individual equities practice at Morrison Foster in Hong Kong, said in an email on Wednesday. ” ,

Many companies that were waiting to stock in the A ratio market in mainland China have made up their mind to switch to A ratio in Hong Kong, he said. “Earlier, things were slowing down with (China Securities Regulatory Commission) approvals but recently our team got CSRC approval very quickly.”

In June, China issued new measures to advertise challenge capital, and the government talked publicly about supporting IPOs, especially in Hong Kong. Traders and analysts said they are now monitoring the pace of IPO approvals for signs of a significant reversal.

Chan said another supportive factor for Hong Kong IPOs is that many companies listed there are based in mainland China, where economic growth is “quite satisfactory.”

He expects consumer corporations to be some of the near-term IPO beneficiaries.

“As the economy gradually 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.

Authentic national-level data showed that retail sales in China are growing slowly – only 3.7% higher in May than a year earlier, compared with increases of about 10% or more in previous years.

Also important for global asset allocation, the US Federal Reserve and other major central banks are holding back from raising competitive interest rates. Higher fees have made Treasury bonds a more attractive investment for many institutions rather than IPOs.

“I would say if interest rates can be cut by another 1%, it will have a significant impact on the IPO market,” Chan said.

Hong Kong IPOs raised $1.5 billion during the first half of the year, down 34% from a year earlier, EY said in a late-release report. According to records, in 2021 and 2020, the Hong Kong Keep Exchange saw about 100 or more IPOs per year, raising tens of billions of dollars.

By comparison, mainland China IPOs are expected to raise $4.6 billion within the first six months of 2024, according to EY – an 85% drop from a year earlier.

Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Limited, said during a final generation conference that so far this year, the Hong Kong exchange has achieved 73 brand new listing programs – a 50% increase compared to the second half of last year. She is not matching with EY’s George Chan.

“The pipeline is building up well,” he said, adding that a total of about 110 IPOs are on the way to list in Hong Kong. “We just need good market conditions to get these things launched and priced well,” he said.

“We need a strong pipeline,” said EY’s Chan. “We need a willing investor with money to invest, and we need a good aftermarket performance.”

Hong Kong IPO returns are improving. According to EY, the average first-day return of new listings in Hong Kong in the first half of 2024 was 24%, much higher than the one% average over the same period at the end of the year.

“The aftermarket performance of Hong Kong IPOs has been quite good compared to the past five years,” Chan said. “All these things combined are projected to drive growth in the Hong Kong market over the next five years.”

Chan said he expects an option to be offered in the second half of 2024.

He said these would be medium-sized – between HK$2 billion to HK$5 billion ($260 million to $640 million) – although he said he expected better market momentum in 2025.

Slow economic growth and lack of geopolitical uncertainty have also hurt early-stage investments in Chinese startups.

According to complementary asset analysis company Preqin, general investment by international investors in Haier China offers fell to $19 billion in 2023, down from $67 billion in 2021.

While U.S. traders have not participated in the biggest offering in recent days, high China date traders remain worried, the company said the previous day.

As far as IPOs of China-based companies in the US are concerned, EY’s Chan said he expects the wave of scrutiny on listings to be “temporary”, even though data protection rules will remain a hurdle.

In early 2023, the China Securities Regulatory Commission formalized new rules that will require domestic companies to comply with national security features and non-public data coverage regulation before moving out of the country. The China-based company, with more than 1 million customers, will have to undergo Beijing’s cybersecurity review to record outside the country.

“As time goes on, when people become more familiar with the Chinese (securities regulatory) approval process and they become more comfortable with geopolitical tensions, more large companies … will consider the US market as their final destination ,” Chan said.

“When the time comes I think institutional investors will be interested in these big Chinese companies, because they want to make a lot of money.”

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

Chinese ride-hailing company Didi, which was delisted from New York in 2021, has denied reports it plans to list in Hong Kong a year later. Speed-fashion company Shein, which makes most of its production in China, is attempting to list in London after a complaint in the US, CNBC reports.