Expert Spotlight: China Deal Momentum – Mid-Year IPOs Review

Analysis by Mergermarket, an Acuris company owned by ION Group

Hong Kong's IPO market set for rebound in 2H21 as China, US discourage ADR listings - dealmakers

• Tech, healthcare dominate
• IPO filings point to recovery
• China's ESG efforts to increase corporate fundraising needs
• HKex’s shorter time to listing to cut costs, risks

After a softer patch in the second quarter of 2021, Hong Kong's initial public offerings will likely rebound significantly over the next six to twelve months, as China tightens scrutiny of overseas listings by its corporates including those based in the Cayman Islands, deal makers said at a 15 July webinar.

China’s regulators, led by the China Securities Regulatory Commission (CSRC), are considering potential rule changes that would require Chinese companies to clear local authorities even for overseas listings. The proposed changes are pending the State Council's approval.

The China Deal Momentum webinar, jointly organized by Datasite, Dealogic (a sister company of this publication) and Toppan Merrill, focused on reviewing Hong Kong's IPOs in the first half of the year, and navigating through the potential opportunities and challenges for the next six to 12 months.

Even before the new rules are revealed, "recent scrutiny into cybersecurity and antitrust issues will definitely have impacts on IPO markets," said Calvin Lai, a Partner at Freshfields Bruckhaus Deringer.

Among the potential changes, any Internet companies sitting on personal data of over 1m users would be the focus of such scrutiny.

That would pose significant uncertainties to Chinese companies seeking a US listing, said Lai.

Companies with businesses directly facing consumers will be impacted the most significantly, Lai said.

Such a shift in China's policy has sent chills across the markets. China's Uber-equivalent, Didi Chuxing [NYSE:DIDI], was inspected by China's Cyberspace Administration of China (CAC) for cybersecurity issues just two days after it got listed with a USD 4.4bn New York IPO. The stock has fallen 18.7% since its debut.

That has forced many companies to rethink their IPO strategies.

ByteDance, which owns Chinese video-sharing social media operator TikTok, has said it is meeting regulators regularly to ensure the company complies with data security requirements.

China's largest mobile fitness app Keep and podcasting platform Himalaya have reportedly canceled their US IPO plans in recent weeks.

As preliminary discussions center around “foreign listings”, whether such inspections will affect Hong Kong listings remains unclear, Lai said.

John Lee, Head of Greater China of Global Banking at UBS, is rather positive. He told the webinar he expects the unfolding regulatory changes are set to encourage more companies to consider more seriously secondary listings in Hong Kong or China, a trend that began around two years ago but waned lately.

Hong Kong Exchanges and Clearing's [HKG:388] stock price has increased 9% since the beginning of July in anticipation of more such listings, he said.

The number of companies getting listed in the first half of 2021 showed a 36% growth compared to the same period in 2020, said Toto Ku, Head of Greater China at Datasite. In June 2021 alone, there were 60 IPO applications filed, Ku said.

"That's sufficient to keep everybody busy in the second half of 2021," Ku said.

The price–earnings–growth (PEG) ratio in Hong Kong's tech stocks, which stands around 0.8x–1x, also implies upside potential, said CICC's managing director Barry Chan. The PEG multiples for A-shares is around 1.7x, and 1.6x for the Nasdaq market, according to Chan.

From a macro point of view, the China economy is recovering well from the COVID-19 pandemic, and with ample liquidity in the market, this will provide further growth momentum to the Hong Kong IPO market, said Chan.

According to CICC’s in-house forecast, China’s GDP growth is expected to expand 8.5% in 2021, which would provide Chinese companies solid momentum for net profit growth, Chan said.

In the second quarter of 2021, China posted a 7.9% GDP growth, slower than 18.3% recorded in the first quarter of the year. 

The high dividend payout ratio in the Hong Kong market – compared to A-share markets – would also provide incentives for capital managers to focus on Hong Kong listing candidates, Chan added.

According to Ku, technology stocks have offered a 31% first-week return, while healthcare IPOs in 2021 offered the best first-week return of 32%. He expects the two sectors to continue dominating the deal pipeline in the next few months, an observation shared by UBS’s Lee.

In 2020, the healthcare sector accounted for 39% of the Hong Kong listing by volume, while the tech sector stood for 27%. In 2021, healthcare and tech each are projected to contribute to 35% of the deal volume, according to Ku.

China on growth vs environment

CICC’s Chan noted that as companies make growing efforts to align themselves with environmental, social responsibility and corporate governance (ESG), he expects there will be some IPOs designed to fund these efforts.

In China, up to 85% of carbon emission comes from seven major sectors – power generation, steel production, transportation, cement, chemical engineering, agriculture, and construction, according to Chan.

To fund carbon neutrality projects, it is estimated corporates might need to raise around CNY 800trn (USD 124bn) per year by 2030, said Chan. And that would only account for around 30% of the total funding needed for the carbon neutrality goal, Chan said. China aims to achieve carbon neutrality by 2060.

Still, “that is definitely not a small number,” Chan said.

Although these industries are often considered “old economies”, as long as the ESG practices are in place, they will come under pressure to raise funds to catch up with the news guidelines – and ESG could well be the next big thing for the IPO markets, he said.

Shorter time to listing

Hong Kong Exchange aims to shorten the window between pricing day and listing day to two days from currently five days by the end of the year. The "T+2" timeframe for listings will enhance market efficiency – as the new scheme won't require the piles of capital to be locked up awaiting the listing, it could therefore reduce the risks and costs for companies and investors, said CICC's Chan.

"That'll be a scheme welcomed by corporates, investors, and banks," said UBS's Lee.

IPO Trends Q&A

with John Lee, Head of Greater China,Global Banking, UBS

This webinar coverage article was originally published by Mergermarket on August 4, 2021; it has been republished with permission.