Hong Kong IPO market expected to improve in next five years | Wilnesh News

BEIJING – Hong Kong’s initial public offering market will improve significantly over the next five years, starting in the second half of this year, Ernst & Young’s global IPO leader George Chan told CNBC on Wednesday.

“I think it will take a few years to get back to the peak (in 2021), but the trend is already there,” Chen said. “I can see the light at the end of the tunnel.”

High U.S. interest rates, regulatory scrutiny, slowing economic growth and U.S.-China tensions have limited IPOs in Greater China over the past three years.

Ernst & Young stated in the report that although the number of IPOs and funds raised in the United States in the first half of 2024 increased significantly compared with the same period last year, the number of IPOs in mainland China and Hong Kong dropped significantly.

Chen, who is based in Shanghai, said many macro trends are now starting to improve, which could support more Hong Kong IPOs.

“We are seeing the trend reversing,” he told CNBC. “We are seeing more and more (dollar) funds coming back to Hong Kong. The main reason is that Hong Kong has factored in these uncertainties.”

this Hang Seng Index It’s up more than 5% so far this year after four straight years of declines, the worst consecutive decline in the index’s history, according to Wind Information.

“Our Hong Kong capital markets team is very busy and our pipeline for the second half of the year is strong. We expect to see a number of Hong Kong exchange listings,” said Marcia Ellis, global co-chair of Morrison Foerster’s private equity practice in Hong Kong. ) said in an email Wednesday.

She said many companies waiting to list on mainland China’s A-share market have decided to list in Hong Kong instead. “Previous (China Securities Regulatory Commission) approvals had slowed things down, but recently our team was able to get approval from the China Securities Regulatory Commission very quickly.”

June, China Launch new measures to promote entrepreneurial investment, The authorities have publicly expressed support for IPOs, especially in Hong Kong. Investors and analysts say they are now watching the pace of IPO approvals for signs of significant change.

Another supporting factor for Hong Kong IPOs is that many of the companies listed on the market are based in mainland China, where economic growth is “quite satisfactory,” Chen said.

He expects consumer goods companies to be among the beneficiaries of recent IPOs.

“As the economy slowly recovers, many people in China are willing to spend money,” he said, noting that this was especially true in less developed areas of China.

Official national data shows China’s retail sales are growing more slowly – up just 3.7% year-on-year in May, compared with growth of closer to 10% or higher in previous years.

Also important for global asset allocation is the fact that the Federal Reserve and other major central banks are backing away from significant interest rate hikes. High interest rates make Treasuries more attractive to many institutions than initial public offerings.

“I would say if interest rates can be lowered further, maybe 1%, that will have a significant impact on the IPO market,” Chen said.

Ernst & Young said in a report released at the end of last month that Hong Kong’s initial public offerings raised US$1.5 billion in the first half of this year, a year-on-year decrease of 34%. The report stated that as early as 2021 and 2020, there were nearly 100 or more IPO transactions on the Hong Kong Stock Exchange each year, raising tens of billions of dollars in funds.

In comparison, mainland China IPOs raised $4.6 billion in the first six months of 2024, a year-on-year decrease of 85%, according to Ernst & Young.

Chan Po-yee, chief executive of Hong Kong Exchanges and Clearing Limited, said at a conference last week that the Hong Kong Exchange has received 73 new listing applications so far this year, an increase of 50% from the second half of last year. She is not related to EY’s George Chan.

“The pipeline is progressing well,” she said, noting that a total of about 110 IPOs are planned to list in Hong Kong. “All we need is a good set of market conditions so that these products can be launched and priced smoothly,” she added.

“What we need is a strong pipeline,” said Ernst & Young’s Chen. “We need an investor who is interested and has the funds to invest, and we need good after-sales performance.”

Hong Kong IPO returns are improving. Data from Ernst & Young shows that the average first-day return rate for new shares listed on the Hong Kong Stock Exchange in the first half of 2024 was 24%, much higher than the average of 1% in the same period last year.

“Compared to the past five years, the post-sales performance of Hong Kong IPOs has been quite good,” Chen said. “Together, these factors predict an upward trend for the Hong Kong market over the next five years.”

Chan said he expects the number of transactions to increase in the second half of 2024.

He said these would likely be mid-sized – between HK$2 billion and HK$5 billion ($260 million to $640 million) – but added that he expected better market momentum in 2025.

Slowing economic growth and geopolitical uncertainty have also affected early-stage investment in Chinese startups.

Total venture capital investment by foreign investors in Greater China deals plummeted from $67 billion in 2021 to $19 billion in 2023, according to data from alternative asset research firm Preqin.

The company said in a report last month that U.S. investors were not involved in the biggest deals in recent years, while investors from Greater China remained involved.

As for Chinese IPOs in the U.S., Ernst & Young’s Chen said he expected the current review of listings to be “temporary,” although Data security rules will remain an obstacle.