Future IPO in Hong Kong
2022.12.12 01:56
Future IPO in Hong Kong
Budrigannews.com – Officials and bankers in Hong Kong fantasize about the day when China will finally lift its restrictions on Covid-19. The reopening of the mainland is essential to revitalizing the city’s capital markets. However, even that is insufficient to guarantee Hong Kong’s continued status as a global financial hub.
Not only in Asia’s main financial center, but also globally, the year for initial public offerings has been terrible. Refinitiv data show that IPO activity is down 95% or more year-over-year in New York and London, while it is down 72% in Hong Kong.
Numerous listings in the Chinese city, including nickel trader Lygend Resources (2245.HK) and Tianqi Lithium (002466.SZ), have relied on friendly cornerstone investors who commit in advance to investing a predetermined amount of money in a deal.
In addition, Hong Kong is losing market share. This year, it claimed 5% of the global IPO proceeds, a steady decline from 19% for the same time period in 2018. Last year, New York had almost 40%. Hong Kong is winning some companies that are already listed elsewhere, particularly Chinese companies that trade in the United States and want a different place to put their stock, but it is losing some first-timers.
There are four fundamental requirements for a global hub for IPOs: companies that want to raise capital, most of which are from outside the region in Hong Kong; ways for money and people to enter and exit; numerous middlemen who are prepared to sell the shares; as well as investors who wish to acquire those shares. These used to be plentiful in Hong Kong. It is now being challenged in all four areas.
It’s likely that the first issue, a lack of issuers, will go away. Eight of the ten largest IPOs ever recorded by Hong Kong Exchanges and Clearing (0388.HK) were conducted by mainland Chinese businesses. At the end of November, Chair Laura Cha of the bourse operator stated at the Reuters NEXT conference that a recovery would follow China’s reopening. A rise in stock prices followed Beijing’s relaxation of some of its Covid-19 restrictions.
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At the very least, that rally will make it more financially viable for shareholders to sell their shares. Since the end of 2017, the Hang Seng Index (.HSI) has gone down 34%, while the S&P 500 Index (.SPX) has gone up 47%.
Hong Kong’s benchmark is valued at 9 times one-year forward earnings, which is close to a multi-decade low. As China’s “Covid zero” campaign fades and executives and investors can once more board planes to enter and exit, accessibility should also improve.
Other issues don’t go away as quickly. Companies in the People’s Republic are unlikely to raise capital for overseas expansion given the rising competitive tensions between the two largest economies in the world, the United States of America and China. Wall Street banks like Morgan Stanley (MS.N), Goldman Sachs (GS.N), and Citigroup (C.N) also find it harder to justify expanding in Hong Kong because of these frictions.
The fact that so many Chinese initial public offerings (IPOs) have political undertones makes them difficult clients. Artificial intelligence giant SenseTime (0020.HK), which delayed its float after being added to a blacklist that prevents U.S. businesses from investing, was avoided by American banks. In the end, HSBC (HSBA.L) and DBS (DBSM.SI) in Singapore assisted in taking it public.
It should come as no surprise that China International Capital (3908.HK), a partially state-owned investment bank that is more commonly referred to as CICC, appears to be on track to top the equity-issuance league table in Hong Kong for the second consecutive year in 2022.
In addition, even though there are signs of progress in resolving a dispute between Washington and Beijing over auditing access to Chinese companies that are listed on U.S. stock exchanges, this could make it possible for around 200 Chinese companies to remain listed there. They won’t need the Hong Kong board as a backup if they stay in the Big Apple.
Then there is the issue of who wants to buy shares that are listed on Hong Kong’s stock exchange. International investors who would rather buy shares onshore are concerned about Beijing’s regulatory crackdowns and worries about a possible information disadvantage. As a result, Chinese-listed stocks trade at a premium to Hong Kong-listed stocks. The gap is currently measured by the Hang Seng China AH Premium Index (.HSCAHPI), where 100 denotes parity.
Breakingviews spoke with bankers who agree that there are good reasons to be optimistic. They think that big Chinese companies will eventually need money from overseas. Chinese businesses can still list in Hong Kong more quickly than in the long line on the mainland. A steady flow of listings will continue to be driven by venture capital investors seeking regular exits from Chinese businesses. Cha anticipates more than 100 IPOs. Adena Friedman, the head of Nasdaq (NDAQ.O), stated at the same Reuters Next conference that it has approximately 200.
Additionally, there are some potential large listings in the pipeline. One is Didi Global, a Chinese rideshare company that was taken off the New York Stock Exchange in June. It intends to float in Hong Kong, but it may still need to persuade Beijing’s authorities that doing so will not compromise the security of its vast collection of consumer data on Chinese consumers, which is one of the reasons it fled American markets.
Cha imagines that additional offerings from Southeast Asia and the Middle East could be hosted in Hong Kong. That will work if her plan to include more foreign companies listed in Hong Kong in Stock Connect, a cross-border trading arrangement, is successful. The plan might make it possible for investors on the mainland to purchase shares of companies that are rarely traded, like Prada in Italy, which is looking into the possibility of a second Milan listing.
That attempt to sell something, however, sits awkwardly against the real world. It is true that Hong Kong is currently China’s primary international entry point, and that is unlikely to change. From a logistical standpoint, the worst effects of Covid-19 may also pass soon. However, the city’s planners and financiers will need to scale back their goals if investors and businesses don’t want to use that gate in the same way they used to.
CONTEXT NEWS The chair of the Hong Kong Exchanges and Clearing said at the Reuters Next conference on November 30 that Hong Kong has more than a hundred applicants in the pipeline for initial public offerings. You can follow Katrina Hamlin and Ugalani on Twitter.
Laura Cha said that the city’s bourse is attempting to draw in additional organizations and financial backers from business sectors including the Center East and Southeast Asia.
Initial public offerings on the Hong Kong trade have raised $7.1 billion such a long ways in 2022, as per Refinitiv information for the year up to Dec. 7. This is in contrast to over $28 billion in 2021. Secondary listings and transactions involving special-purpose acquisition companies are not included in the figures.
