Hong Kong Queue of IPO Hopefuls Faces Market Reckoning

The number of companies filing to go public in Hong Kong has jumped almost threefold this year, driven in part by China’s burgeoning technology sector, but they will have to contend with weaker markets which could hurt deals.

Hong Kong is on track for a bumper year of initial public offerings (IPOs), spurred by a market rally late last year and listing reforms designed to attract high-growth technology and biotechnology companies.

So far, this year 214 companies have filed with the Hong Kong stock exchange, up 170 percent from last year when only 79 submitted applications, according to Thomson Reuters data.

The financial hub also overtook New York in IPO volumes, with $27.7 billion raised so far this year, the data showed.

“There’s a lot more that got started than will get finished,” said Stephen Peepels, head of U.S. Securities, Asia Pacific for law firm Hogan Lovells. “There’s probably not enough investor demand to take on all the IPOs that have been announced during 2018.”

The huge spike in companies wanting to go public is also due to the nature of the businesses, which tend to be younger, fast-growing and in need of cash - especially from China - marking a change from the years when Chinese state-owned enterprises did the main IPOs in Hong Kong.

However, bankers expect some of them could choose to raise money privately instead, putting off IPO plans as long as markets remain difficult.

“You’ll likely see some smaller transactions push out their timetable a bit,” said Sunil Dhupelia, Head of Equity Syndicate, Asia ex-Japan at Credit Suisse.

Across Asia, companies have raised $70.5 billion in IPOs in the first three quarters of 2018, up 23 percent from the same period last year and the highest since 2014.

But performance has been patchy in Hong Kong, with some of the bigger deals still trading below their IPO price, such as smartphone maker Xiaomi, which went public in July in the world’s biggest tech float in four years.

“Investing in Hong Kong IPOs has not driven investor returns in the past 6-7 months which has contributed to the general sentiment and valuation sensitivity,” said Finlay Wright, Director, Equity Capital Markets at Rothschild Global Advisory. “It feels like it would only take a few deals not succeeding to damage confidence and hit the rest of that pipeline.”

TRADE TENSIONS

Weak markets amid global trade tensions - which have hit emerging markets particularly hard - have weighed on many deals, making investors more selective.

“When markets are falling, many investors would choose not to participate in IPOs as the company’s stock prices are more likely to fall below IPO prices once it starts trading,” said Jian Shi Cortesi, portfolio manager of Asian equities for GAM

Volvo Cars and its Chinese owner Geely earlier this month postponed plans to float shares in the Swedish carmaker because of Sino-U.S. trade tensions and a downturn in automotive stocks.

However, companies from the region are still lining up to go public - from Chinese movie ticketing app Maoyan Weying to Tencent Music, the music streaming company owned by Chinese tech giant Tencent Holdings (0700.HK).

Last week, Chinese online food delivery-to-ticketing services firm Meituan Dianping gained about 5 percent on its Hong Kong debut, sending a positive signal to other companies in the pipeline, although it was last trading below its IPO price.

“The buy side wants access to China. They want access to the consumer,” said Aaron Arth, Head of Financing Group for Asia ex-Japan at Goldman Sachs, referring to the market weakness.

“While some of these deals could be performing better, most investors would say over the long term, these companies will show growth and value creation.”

Goldman topped the league table for equity raising in the region, followed by Morgan Stanley  and Citigroup.

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