The Hong Kong IPO market is preparing to return to form

After a dismal first half of 2022, the Hong Kong IPO market regained momentum in the second half of the year. Refinitiv data shows that 75 listings raised $12.69 billion.

Certainly, the performance was weaker than in 2021, with the number of deals and total revenue down 25% and 70%, respectively, through early December. Ironically, however, the Hong Kong IPO market ended up being the third largest in the world in terms of funds raised in 2022 after Shanghai and Shenzhen thanks to a boom in deals in the second half of the year.

Analysts head towards 2023. This year, KPMG believes that the Hong Kong IPO market will continue to be one of the top listed destinations globally with a strong pipeline of more than 120 companies seeking IPOs targeting a fundraising of HK$180 billion. From about 90 deals. For its part, Deloitte expects 110 companies to raise about HK$230 billion.

While 2022 was a tough year for equity markets globally due to high interest rates and market volatility, the outlook for 2023 is better as interest rates are expected to stabilize.

Hype and reality

Will Hong Kong become the world’s largest fundraising market in 2023? Given the competition from the mainland and US stock exchanges, it seems like a tough task.

However, this is exactly what some observers expect. They point to new listing regulations discussed last October that allow technology companies with profits of at least HK$15 billion (US$1.9 billion) to apply to the list as early as 2023. Technology companies in sectors including computing Cloud and artificial intelligence, electric and self-driving cars, semiconductors and the metaverse may qualify under the new rules.

At the same time, the links between Hong Kong and the mainland were restored after a long period. With borders reopening on January 8, there are high expectations that market activity will return to normal, which has spurred big-ticket deals this year.

While we expect the Hong Kong IPO market to perform strongly in 2023, there are a few factors to consider that the bulls seem to be ignoring. First, the consumer tech company’s pipeline, which was one of the biggest drivers of the Hong Kong listing, remains in limbo due to uncertainty over the status of China’s crackdown on technology. How long will it last?

In an optimal scenario, the storm finally passes after the meeting of the National People’s Congress and the Chinese People’s Political Consultative Conference in March.

For a real return to form, Hong Kong needs the Ant Group IPO which was suspended at the eleventh hour in November 2020 to revive it. If Ant’s IPO is approved, other Chinese fintechs like JD Digits will know the tech crackdown is finally over and resume plans for their Hong Kong IPO.

competition from the mainland

Meanwhile, keep in mind that “hard tech” companies in areas targeted by the new listing regulations (metaverse being an exception) are flocking to the star market in Shanghai and to the ChiNext Exchange in Shenzhen in line with the central government’s goals to build internal capital markets and develop sufficiency. Self in strategic next generation technologies. It is unclear how Hong Kong will be a more attractive listing destination than the mainland for companies with political and geostrategic considerations.

Last year, about 400 companies went public on mainland China stock exchanges, raising a record 560 billion yuan ($80.4 billion), up 3% from 2021, according to PricewaterhouseCoopers. Among the reasons for the strong performance are the resilience of the Chinese economy, the emergence of many technology companies and the return of large overseas-listed red chip companies to mainland stock exchanges.

Bloomberg reports that 9 of the 391 debuts in China in 2022 raised more than $1 billion, making up 40% of deals of this size or greater globally. Hong Kong came second with 3 deals worth US$1 billion.

The deletion dilemma

Meanwhile, although Hong Kong should have benefited from the expected delisting of US-listed Chinese companies still seeking access to a large pool of global capital, it now appears that may not be a sure thing. In mid-December, US regulators said they were allowed to inspect the work of auditors in China for the first time, allaying fears — at least for now — that some 200 Chinese firms could be expelled from US capital markets. In August, US and Chinese regulators reached an agreement on audits, a long-standing sore point between Washington and Beijing.

If the agreement does not hold, Hong Kong may be able to acquire a significant portion of Chinese companies if it chooses to re-emerge. A January 2022 report by brokerage firm China Renaissance found that about 80 US-listed Chinese companies could meet HKEX’s listing requirements for either direct listing or secondary flotation.