Consulting Firm EY Predicts Turnaround for Hong Kong's IPO Market

TMTPOST--The market for initial public offerings (IPOs) in Hong Kong is poised to see significant improvement over the next five years, starting in the second half of this year, said George Chan, the head of the global IPO team at EY, in a Wednesday interview with CNBC.

“It will take a couple of years to return to the peak levels seen in 2021, but the trend is positive,” Chan remarked. “I can see the light at the end of the tunnel.”

Over the past three years, high U.S. interest rates, regulatory scrutiny, slower economic growth, and U.S.-China tensions have hindered IPOs in Greater China region.

A report by EY highlighted that while IPO volumes and proceeds in the U.S. increased substantially in the first half of 2024 compared to the previous year, Chinese mainland and Hong Kong experienced a sharp decline in the number of listings.

Chan, based in Shanghai, noted that many trends are now starting to turn around, which could support more IPOs in Hong Kong.

“We are seeing a reversing trend,” he told CNBC. “We are seeing more of these [U.S. dollar] funds, they are moving back to Hong Kong. The main reason is that Hong Kong has already factored in these uncertainties.”

The Hang Seng Index has risen more than 5% year-to-date after four consecutive years of decline—the worst losing streak in its history, according to Wind Information.

Marcia Ellis, global co-chair of the private equity practice at Morrison Foerster in Hong Kong, mentioned in an email that their HK capital markets team is very busy with a strong pipeline for the second half of the year. “We expect to see many HKSE listings,” she said.

Many companies awaiting listings in Chinese mainland’s A-share market have shifted to Hong Kong, Ellis noted. “China Securities Regulatory Commission (CSRC)’s approval was previously a bottleneck, but our team has recently obtained approvals more swiftly.”

In June, China introduced new measures to promote venture capital and publicly supported IPOs, especially in Hong Kong. Investors and analysts are now watching the speed of IPO approvals for signs of a significant change.

Chan pointed out that many companies listed in Hong Kong are based in Chinese mainland, where economic growth remains “quite satisfactory.” He expects consumer companies to be among the near-term IPO beneficiaries.

“As the economy slowly recovers, many people in China are willing to spend, particularly in less developed areas.”

Although national-level data shows that retail sales in China are growing more slowly—up by just 3.7% in May compared to nearly 10% or more in previous years—this has not dampened investor interest.

Globally, major central banks, including the U.S. Federal Reserve, are pulling back from aggressive interest rate hikes. High rates have made Treasury bonds more attractive than IPOs for many institutions.

Chan mentioned, “If interest rates could be cut by 1%, it would significantly impact the IPO market.”

During the first half of the year, Hong Kong IPOs raised $1.5 billion, a 34% drop from the previous year, according to EY. In contrast, Chinese mainland IPOs raised $4.6 billion in the first six months of 2024, an 85% hike from the same period last year.

Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Limited, noted at a recent conference that the Hong Kong exchange has received 73 new listing applications so far this year—a 50% increase compared to the second half of last year.

“The pipeline is building up nicely,” she said, with about 110 IPOs lined up for Hong Kong listings. “All we need are favorable market conditions for these listings to launch and price well.”

Improving post-IPO performance is crucial. Chan from EY said, “We need a strong pipeline, interested investors with money to invest, and good aftermarket performance.”

Hong Kong IPO proceeds are improving, with the average first-day proceed of new listings in the first half of 2024 at 24% (of what?), significantly higher than the 1% average in the same period last year.

“The aftermarket performance of Hong Kong IPOs has been quite good compared to the past five years.” Chan said. “These factors together indicate an upward trend for the Hong Kong market over the next five years.”

Chan expects the number of deals to increase in the second half of 2024, primarily medium-sized deals between two billion and five billion Hong Kong dollars ($260 million to $640 million), with better market momentum anticipated in 2025.

Slowing economic growth and geopolitical uncertainty have also impacted early-stage investment in Chinese startups. Total venture funding from foreign investors into Greater China deals plummeted to $19 billion in 2023, down from $67 billion in 2021, according to Preqin, an alternative assets research firm.

U.S. investors have not participated in the largest deals in recent years, while Greater China investors have remained active.

Regarding IPOs of China-based companies in the U.S., Chan believes the current scrutiny is “temporary,” although data security rules remain a challenge.

Early in 2023, CSRC formalized new rules requiring domestic companies to comply with national security measures and personal data protection laws before going public overseas. Companies with over one million users must pass China’s cybersecurity review to list abroad.

Chan anticipates that as familiarity with the Chinese regulatory process grows and geopolitical tensions ease, more large companies will consider the U.S. market as their ultimate destination.

“Institutional investors will be interested in these sizeable Chinese companies as they seek profitable opportunities,” he said. While he declined to comment on specific IPOs, he noted that certain high-profile listing plans are “isolated incidents.”

For instance, Chinese ride-hailing company Didi, which delisted from New York in 2021, has denied reports of plans to list in Hong Kong next year. Similarly, fast-fashion company Shein, which does most of its manufacturing in China, is reportedly seeking a London listing following meeting with criticisms in the U.S.