Hong Kong's IPO market is expected to improve over the next five years

BEIJING – Hong Kong's IPO market is set to improve significantly over the next five years, starting in the second half of this year, George Chan, global IPO leader at EY, said in an interview with CNBC on Wednesday.

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

High interest rates in the United States, regulatory scrutiny, slowing economic growth, and U.S.-China tensions have constrained IPOs in Greater China over the past three years.

While IPO volumes and proceeds in the United States increased significantly in the first half of 2024 compared to the same period last year, China and Hong Kong saw a sharp decline in listings, EY said in a report.

Many macro trends are now starting to shift, which could support more IPOs in Hong Kong, added Chan, who is based in Shanghai.

“We are seeing the opposite trend. We are seeing more of these (dollar-denominated) funds coming back to Hong Kong. The main reason is that Hong Kong has already taken these doubts into account,” he told CNBC.

the Hang Seng Index The U.S. stock market index has risen more than 5% since the beginning of the year after four straight years of declines — the worst losing streak in the index’s history, according to Wind Information.

“Our Hong Kong capital markets team is very busy and has a strong pipeline for the second half. We expect to see several HKEx listings,” Marcia Ellis, global co-head of Morrison Forrester’s private equity practice in Hong Kong, said in an email Wednesday.

She said many companies that were waiting to list on the Chinese stock market decided to switch to the Hong Kong market. “Previously, the approval from the China Securities Regulatory Commission slowed things down, but recently our team got the approvals from the China Securities Regulatory Commission very quickly,” she added.

In June, China issued new measures to boost venture capital, and authorities have spoken out publicly about supporting initial public offerings, particularly in Hong Kong. Investors and analysts said they are now looking to the speed of IPO approvals for signs of a major change.

Another factor supporting a Hong Kong IPO, Chan said, is that many of the companies listed on the market are based in mainland China, where economic growth is “quite satisfactory.”

Consumer companies are expected to be among the beneficiaries of the IPO in the near term.

“With the economy slowly recovering, many people in China are willing to spend,” he said, noting that this was especially true in less developed parts of the country.

Official data at the national level showed that retail sales are growing at a slower rate in China – rising just 3.7% in May from a year earlier, compared with growth of around 10% or more in previous years.

Also important for global asset allocation is that the US Federal Reserve and other major central banks have begun to pull back from sharp interest rate hikes. Higher interest rates have made Treasuries a more attractive investment for many institutions than initial public offerings.

“I would say if the interest rate could be lowered further, maybe by 1%, it would have a big impact on the IPO market,” Chan said.

Hong Kong IPOs raised $1.5 billion in the first half of the year, down 34% from a year earlier, EY said in a report late last month. In 2020 and 2021, the Hong Kong stock exchange saw roughly 100 or more IPOs annually raising tens of billions of dollars, according to the report.

By comparison, IPOs in China raised $4.6 billion in the first six months of 2024 — an 85% decline compared to the same period last year, according to EY.

Hong Kong Exchanges and Clearing Ltd. has received 73 new listing applications so far this year — a 50% increase from the second half of last year, Bonnie Chan, chief executive of Hong Kong Exchanges and Clearing Ltd., told a conference last week. She’s no closer to EY’s George Chan.

“The pipeline is developing well,” she said, noting that there are about 110 IPOs waiting to be listed in Hong Kong. “All we need is a set of good market conditions for these things to take off and be priced well,” she added.

“We need a strong pipeline. We need an interested investor with money to invest, and we need good performance in the secondary market,” said EY’s Chan.

Hong Kong IPO returns are improving significantly. According to EY, the average first-day return for new listings on the Hong Kong Stock Exchange in the first half of 2024 was around 24%, much higher than the average of 1% in the same period last year.

“The post-sale performance of Hong Kong IPOs has been very good compared to the past five years. Taken together, these things predict an upward trend for the Hong Kong market (in) the next five years,” Chan said.

Chan said he expects the number of deals to pick up in the second half of 2024.

He said these investments are likely to be medium-sized – between HK$2 billion to HK$5 billion ($260 million to $640 million) – but added that he expects better market momentum in 2025.

Slowing economic growth and geopolitical uncertainty have also had a negative impact on early-stage investment in Chinese startups.

Total project financing from foreign investors in major Chinese deals fell to $19 billion in 2023, compared with $67 billion in 2021, according to Preqin, an alternative assets research firm.

US investors have not been involved in the largest deals in recent years, while investors from Greater China have remained involved, the firm said in a report last month.

Regarding Chinese companies’ initial public offerings in the United States, EY’s Chan said he expects the current scrutiny of such listings to be “temporary,” although data security rules will remain an obstacle.

In early 2023, the China Securities Regulatory Commission issued new rules requiring domestic companies to comply with national security measures and the Personal Data Protection Law before going public overseas. Any China-based company with more than 1 million users must pass a cybersecurity review in Beijing before listing overseas.

“Over time, as people become more familiar with the Chinese approval process and become more comfortable with geopolitical tensions, more major companies … will consider the U.S. 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 big 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 the New York Stock Exchange in 2021, has denied reports that it plans to list in Hong Kong next year. Fast-fashion company Shein, which manufactures most of its products in China, is trying to list in London after facing criticism in the United States, CNBC reported.