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Best for the last? HK IPO market in waiting mode


A dearth in much-expected deal flow could end sooner than expected

Hong Kong’s IPO market is having a disappointing post-summer season.

Typically, deals flourish from late August onwards, but this year has been different. There have been a few listings, albeit small, while headline-grabbing deals that had been expected to hit the market have been put on the backburner. Some IPO-hopefuls are delaying bookbuilding, while others are letting their IPO applications lapse.

The dip in IPO flow could be worrying for some investment banks and investors. After all, they have had to face the brunt of an increasingly tough regulatory environment this year as the Mainland Chinese government cracked down on the technology and the education sectors. Beijing also increased oversight of offshore IPOs from the country, effectively putting a halt to the buoyant China-into-US listings market.

These raise critical questions. Is the lull in Hong Kong a result of that growing oversight? Will Chinese listings in Hong Kong, a key source of revenues for banks and a big reason why the city’s exchange has long been humming, also wither away? And perhaps more importantly, what does this mean for issuers, ECM bankers and investors looking for opportunities?

The market should not fear. As ECM adjusts to an increasingly tough regulatory backdrop, Hong Kong will likely find itself in a sweet spot as the best option for Chinese companies wanting to tap international investors.

The dull third and early fourth quarters on the Hong Kong Stock Exchange were only to be expected. Beijing stunned its homegrown companies into silence at the end of the first half with its sudden crackdown on the country’s largest ride hailing company, Didi, and subsequent warnings on overseas listings.

This means there were just four IPOs on the HKEX in September, the largest being a HK$9.09bn ($1.17bn) deal by state-owned Dongguan Rural Commercial Bank, and two so far this month, Dealogic data shows.

In total, around $2.75bn in IPO capital has been raised through eight deals in the second half so far. In comparison, 10 companies listed for a combined $4.76bn in the same period last year — six of them had come in September, three in October, while bottled water company Nongfu Spring sealed its HK$9.6bn IPO at the end of August 2020.

Hong Kong was expected to have a busier post-summer period following its scorching first half of 2021. But instead, it is seeing a possible dwindling in the immediate pipeline.

High profile listing applications, such as by Tencent Holdings-backed healthcare platform WeDoctor, have expired. In Hong Kong, companies have six months after filing a draft prospectus with the exchange before they must submit new documents with updated financials. WeDoctor’s application lapsed earlier this month.

Music streaming service Cloud Village, a unit of Chinese internet company NetEase, is understood to have scrapped its IPO due to poor market conditions, just days after getting listing approval from Hong Kong’s bourse in August.

Other issuers are still preparing IPOs, but at a leisurely pace. For example, artificial intelligence giant SenseTime is continuing the approval process with the HKEX for its IPO, but is in no rush to come to the market, GlobalCapital Asia understands.

SenseTime did not respond to a request for comment by the time of publishing. WeDoctor could not be reached.

Being hesitant is wise, particularly given SenseTime’s IPO is expected to fetch up to $2bn. The few deals that have made it to market recently have been worth a few hundred million dollars at most and, while covered, demand was nothing to brag about.

Hong Kong’s usually fervent retail investor force is also considerably quieter than in the first half when they were oversubscribing everything they could get their hands on. In recent listings, they have not triggered the clawback option — a mechanism that reallocates shares to retail based on the level of oversubscription.

ECM bankers in the city have told GlobalCapital Asia that in some cases they have struggled to find sufficient demand during pre-marketing to launch a deal, turning a typical one or two week process into twice as long.

However, this is no death knell for Hong Kong. Instead, a bigger revival towards the end of the year looks more likely.

For starters, IPO-hopefuls continue to file and refile draft prospectuses every week. China-based restaurant company Green Tea Group, for instance, refiled listing paperwork this month after its initial application lapsed in September.

Additionally, Hong Kong is set to be the primary offshore listing venue for Chinese issuers, if it wasn’t before, since Beijing tightened restrictions on overseas listings for any local company that handles data for more than 1m users. In a country of 1.4bn people, most data-based businesses fall in that category.

The favoured US stock exchanges are now a risky choice for China’s technology start-ups, with tougher regulatory hurdles to get past and investors wary of unpredictable regulators.

China’s multitude of technology firms will have to turn to Hong Kong, which in this case is not considered an ‘overseas’ destination for IPOs by Mainland regulators. That could prove a boon for the exchange.

Hong Kong just needs to wait out its dry IPO spell. The bumper deals will return before too long.

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