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It ain’t over yet: HK ECM faces hurdles before year end

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By Jonathan Breen
30 Oct 2018

Hong Kong equity investors may feel they need a break after a year of underperforming IPOs, sharp declines in valuations and protracted volatility. But don’t call time on the market just yet.

Hong Kong’s market has been hectic this year, driven in large part by the stock exchange’s long-awaited decision in April to amend its rules to allow technology companies to float dual-class shares, as well as paving the way for listings by pre-revenue biotechnology firms. A pipeline quickly blossomed for both, but the second half of 2018 turned into a mess as stock after stock tanked.

The shocking global rout in equity markets in October has added insult to injury and consequently many bankers are predicting that most of the buyside is likely to go into hibernation for the rest of the year. But a small group of bankers will be praying the gates are not closed just yet. There are still deals to get done.

Four mainland firms — Babytree Group, Mobvista, Tongcheng-Elong Holdings and Wanka Online — believe they can make it next month, bringing $3bn of IPOs between them. Hong Kong investors will need to hold their nerve a little longer.

Why exactly are these companies pushing ahead with Hong Kong IPOs after a flood of tech listings that have almost all fallen underwater in the aftermarket? Some of the biggest and most disappointing IPOs this year include those by smartphone maker Xiaomi and food delivery start-up Meituan Dianping, which raised HK$37.1bn ($4.7bn) in July and HK$33.1bn in September, respectively. But both stocks have since tumbled more than 30%.

The answer to that question appears to be simple: the money is still there. Despite the barrage of volatility, telecom, media and technology deals have continued to get done. Investors, retail and institutional alike, still appear to be mesmerised by the relative scarcity value of new economy companies. The supply of IPOs in large part petered out in early October, but even last week Chinese biotech firm Innovent Biologics was able to get away with HK$3.3bn, pricing just below the top of guidance.

So, although it is clearly brave, it seems more than just a gamble to bank on there being some remaining demand from investors. There is a real chance that at least some of the quartet will get their deals away. The end of this year will say a lot about the appetite of investors — and their willingness to keep diving in to a volatile market.

By Jonathan Breen
30 Oct 2018