HKEX’s IPO standing is better ignored
As the first half comes to an end, the ECM market appears concerned that Hong Kong has lost its title as the top IPO destination in the world, slipping behind China and the US. The drop may be disappointing but market watchers should not read too much into that. The city’s exchange is on much stronger footing this year when compared to 2016.
During the first half of 2016 Hong Kong was heavy with IPOs, but nearly two-thirds of the volume came from a trio of Mainland financials, each of which placed over 50% of their deals with Chinese cornerstones. One issuer even allotted nearly 80% to cornerstone investors, with the practice becoming a black mark for many Chinese firms listing south of the border.
But what a change a year can make. The dominance of cornerstones and the lacklustre support from institutional investors last year is in stark contrast to what the Hong Kong IPO market has seen so far this year, even if volumes have come down. And that is what the market should focus on.
For starters, IPOs have been less concentrated in 2017 and investors, including institutional accounts, have had the chance to buy a diverse batch of IPOs, with reduced cornerstone involvement.
There have been $4.32bn worth of IPOs so far this year in Hong Kong, spread across 30 transactions. Chinese companies were behind $3.7bn worth of that via 16 listings, but just $1.5bn came from FIG names — a pair that brought distinctly cornerstone-light deals, with allocations of only between 32% and 41%.
In comparison during the six months to June 30 last year, Hong Kong hosted 23 IPOs amounting to $6.26bn, the highest amount of any stock exchange in the world, according to Dealogic. But of those, 12 were Mainland names, worth $4.74bn, and included $3.74bn by a pair of banks and a leasing company, which allotted cornerstones between half to three-quarters of their flotations.
So ECM bankers worried about Hong Kong losing its top IPO ranking globally to New York and Shanghai, first and second respectively, need to look beyond that drop.
In addition to better names hitting the market this year, the city has also seen four listings from the education sector, a particularly hot industry as companies ride high on China’s much anticipated law on promoting private schools and its second-child policy.
And the HKEX is also planning ahead, and trying to adapt. It took a positive step this month towards conquering the market for Asia’s tech firms and start-ups when it published a consultation paper for a new board that could host dual-class share structures — a favourite of new economy companies.
But even more importantly, the secondary market in Hong Kong has gone through the roof this year — a welcome transformation given the dismal performance in 2016. Year-to-date the benchmark Hang Seng Index is up 16.9%, compared to a 5.1% slide during the same period last year. The HSI closed last year up just a tiny 0.1%.
Admittedly, it is less stellar on Hong Kong’s Growth Enterprise Market. The junior board dived on Tuesday following a heavy sell-off in small-cap stocks, with the GEM index closing down 9.7%. Granted, the drop was shocking as around $6bn of capitalisation was erased.
Nevertheless, superficially the Hong Kong Stock Exchange might look like it is trailing behind its peers. But the bourse is clearly in a good spot and, by many measures, it has had a strong first half. That is worth getting excited about.