Hong Kong IPOs hit 9-year high

At a time when its critics were doubting Hong Kong’s status as a top financial center, the city’s stock exchange has bounced back with a surge in share offering volumes, a near-decade high.

Hong Kong has raised US$37 billion in share offerings in the year to date overtaking 2018’s total of US$36.7 billion, already the highest since 2010 when offerings aggregated US$67.9 billion, according to data compiler Dealogic. And with another US$1.2 billion expected to materialise this month, 2019 could end up with a total of US$38.2 billion.

There have been a few factors contributing to this success even as the economy contracted on a quarterly basis for the first time in a decade.

“The introduction of dual class listings has provided a boost as have the tight credit conditions in mainland China. The authorities are making it difficult for companies, particularly the highly leveraged ones, to borrow given the default situation,” said Nitin Dialdas, CIO of Mandarin Capital.

In 2018, some companies were permitted to list with weighted voting rights (WVR) if they were able to prove they were innovative companies. This was followed by an agreement between HKEX and Mainland China exchanges to include WVR companies in southbound trading of Stock Connect.  This agreement was to be implemented in 2019.

Moody’s Investor’s Service said increasing onshore bond defaults in China are raising investor risk aversion. This risk aversion is unlikely to diminish amid China’s slowing economic growth and uncertainty surrounding the US-China trade dispute. S&P Global said in a report last month that onshore defaults from January-October 2019 topped 100 billion yuan and in the full year should exceed last year’s record of 111 billion yuan.

“In such an environment, Hong Kong is a natural port of call for companies raising funds,” Dialdas said.

Alibaba’s US$12.9 billion blockbuster was a major driver that propelled this year’s aggregate as  authorities wanted to send out positive signals amid the protests in the city. There was no other reason for the Hong Kong listing at this particular time given that the company was already listed in the world’s most liquid market, Dialdas said.

“And with Jack Ma stepping down and Beijing exerting greater control, the Hong Kong listing is understandable,” he said.

Other issuers such as Budweiser Brewing (US$5.75 billion), ESR Cayman (US$1.79 billion), Shenwan Hongyuan (US$1.16 billion), Hansoh Pharmaceutical (US$1.15 billion) and Topsports International (US$1.15 billion) added to the tally.

“While the total deal volume has been boosted by a few large deals, significant increase in number of deals seems to reaffirm the issuers’ confidence in the Hong Kong market,” said Manishi Raychaudhuri is BNP Paribas’ Asia Pacific Equity Strategist.

The deal flow accelerated in the September-November period which, not coincidentally, was a period of worldwide equity market buoyancy driven by global central banks’ increasingly benign outlook on monetary policy and receding concerns on trade conflict and no-deal BREXIT, he added.

“We believe the trend of strong deal flow, though contingent on how the equity market behaves, should continue in 2020. Deal flow should be aided by the innovations and regulatory changes effected in the Hong Kong capital market and the fact that the HK Exchange remains a preferred venue of choice for mainland Chinese corporates for raising offshore capital.”

A better year awaits the exchange.

“Hong Kong’s IPO market remains very much open for business, having welcomed some of the world’s biggest listings this year,” a Hong Kong Exhange spokesman said. “We have a vibrant market and a healthy IPO pipeline, and we look forward to welcoming more global quality companies to our markets.”