Make no mistake about it, Chinese issuers are very important to Hong Kong. Of the $21.7bn raised last year, $19.3bn - a whopping 89% - came from deals for Chinese firms, such as China Everbright ($3.2bn) and China Cinda Asset Management ($2.8bn).
With a lot of issuers forced to turn to Hong Kong as a result of the A-share market’s one-year IPO moratorium,– the reopening of China’s domestic market unsurprisingly led to talk of reduced IPO volumes in the special administrative region at the start of the year.
But with a strong looking pipeline, the predicted doomsday scenario for Hong Kong has yet to emerge from the chatter and it’s worth examining whether the new and improved A-share market is really all it’s cracked up to be.
The three highs
Shanghai listed companies in 2012, for example, traded at an average P/E multiple of 12.25 times compared to Hong Kong’s 9.75 times. As a result, most companies were able to raise a lot more money in the domestic market and the advantages of a foreign listing, such as greater international exposure, were simply not strong enough to overcome the huge gap in valuations.
Fast forward to 2014, however, and the numbers tell a very different story. When the China Securities Regulatory Commission announced a slew of IPO reforms to accompany the reopening of its domestic market, its objective was simple – to curb these three highs.
Gone are the unrealistically high P/E multiples - so much so that as of Tuesday afternoon, Shanghai listed stocks trade only at an average of 10.85 times, barely higher than Hong Kong’s 10.59 times.
Using forward-looking P/Es is even starker, with those stocks valued at an average of 8.1 times, which is lower than Hong Kong (close to 10 times), or any other major stock exchange in the world.
On that basis, there are few financial benefits to an issuer forsaking a Hong Kong IPO for an onshore listing, not to mention the hassle of the additional preparation work and a waiting list of around 700 companies.
Instability
Most importantly, market conditions for China’s A-share market have yet to stabilise thanks to the drastic structural overhaul and a flurry of IPOs – with close to 50 in January alone. And even though China has stressed on more than one occasion that it is looking at a market-oriented system, that doesn’t necessarily mean no intervention at all.
Last month the CSRC had intervened in the pricing of several A-share IPOs due to concerns over unrealistic valuations. It also introduced extra rules to strengthen the price discovery process and prevent malpractice from brokers and investors alike.
That is not surprising, since changes are only to be expected for a completely new system that remains largely untested. Hong Kong, on the other hand, offers a more established and stable equity market and a great deal of investor familiarity. Potential Chinese issuers should keep that in mind.
While China’s A-share market will continue to make headlines, talk of it challenging Hong Kong’s position is still premature. A lot more time is needed for everyone – the CSRC, brokers, investors - to digest all the changes happening in the onshore market. That ought to give the doomongers pause for thought for at least a few more years.