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Hong Kong IPOs: Time for a reboot

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By John Loh
04 Oct 2016

Hong Kong has climbed to the top of the charts again for IPO volumes globally, but it is a victory that rings hollow. The city got there mostly thanks to the assistance of friends and family in the Mainland, as Chinese investors helped push Chinese listings across the line. It is time for the market to move on.

To have retained the top spot in the world for IPOs – in a year when equity capital market volumes in Asia ex-Japan ex-onshore China have halved – is indeed impressive. For the first time since 2009, Hong Kong led on IPOs in the nine-month period with $15.1bn deals pricing up to September, according to Dealogic.

The 42 floats on its roster were dominated by Postal Savings Bank of China, whose HK$57.6bn ($7.4bn) IPO was the world’s biggest in the two years since Alibaba Group’s US listing raised $25bn in 2014.

Coming in first is nothing new for the Hong Kong bourse. It was number one for IPOs in 2015 with $33.6bn worth of deals, and as an IPO destination has consistently ranked in top five since 2011.

But it would be spurious to call this a triumph. Hong Kong owes much of its success to the wall of Chinese money that has increasingly become an integral part of any IPO, whether they be Mainland corporates or state-owned enterprises (SOE).

And allocations to cornerstone investors have risen to a record high, as banks have little choice but to pre-sell large chunks of stock to de-risk trades. That has had unintended consequences, such as the lack of first-day pops. On its debut, Postal Savings Bank ended with just a HK$0.01 premium to its issue price.

There were other issues of course, including the significant premium at which Postal Savings Bank had to sell its shares versus other listed Chinese lenders. This is due to China’s cap on sales of state-owned assets and banks for no less than book value.

Meantime, Postal Savings Bank’s mainly SOE-led cornerstone group gobbled up 76% of its IPO, so it is second only to China Development Bank Financial Leasing Co for Hong Kong listings of above $500m with the biggest cornerstone tranches.

Gone are the days when Hong Kong could reel in the likes of L'Occitane and Prada for listings, as international investors are increasingly crowded out of the market and foreign bulge brackets scale back.

Thankfully, there is some light at the end of the tunnel. As the market rebounds, Hong Kong is expected to play host to a crop of technology listings next year. The likes of Ant Financial and Zhongan Online P&C Insurance Co have indicated their interest in a Hong Kong float, while Lufax has picked banks to lead its $5bn transaction. Elsewhere, Meitu has filed to list in Hong Kong.

Each one would be an interesting test of how the Hong Kong market, which is not known as hub for technology listings, and investors will respond. Each is also a leader in their respective field, and do not share Alibaba’s fixation with the dual-class share structure.

Hong Kong can only lay claim to one major listed Chinese technology firm – Tencent Holdings – so it remains to be seen how the market will value new entrants to its bourse from the technology space.

Bankers and investors are expected to do their part to make the most of this theme, but the regulators must also pull their weight.

There is disquiet among market watchers that some of the regulator’s demands constrict the technology sector, such as the criteria for suitability, which can often be subjective. And unlike the Nasdaq, Hong Kong still requires a track record of profitability.

Even though the Securities and Futures Commission has previously rejected the exchange’s proposal for dual-class shares, there is scope to reconsider this stance. Meanwhile, there are other ways to spur equity issuance from the technology sector, like setting up a board aimed specifically at these listings.

Hong Kong IPOs have made great strides when it comes to size, but on other counts the market has faltered. It’s time for a reboot. 


By John Loh
04 Oct 2016