Hong Kong’s lukewarm IPO market may be about to heat up

By Fai Pui

Hong Kong brewed up a tepid IPO market in the first half of the year, when the biggest new listing was a tea shop chain whose shares sank on their trading debut.

But there could be signs of a recovery in the tea leaves. Analysts say the listing pace should pick up later in the year, pushing Hong Kong back up the global ranks of IPO destinations after several lean years.

The subdued performance of Hong Kong stocks this year put a squeeze on the IPO pipeline. Only 30 companies went public on the Hong Kong Stock Exchange in the first half, all but one of them on the main board. The IPOs raised about HK$13.1 billion ($168 million) in total, 27% less than in the same period last year. Not only did Hong Kong lag behind U.S. market heavyweights such as the New York Stock Exchange and Nasdaq, it also ranked below India as an IPO hub.

Hong Kong’s IPO roster so far this year was missing a supersized deal, hobbled by investor caution. Tea shop operator Sichuan Baicha Baidao (2555.HK) raised the biggest amount at HK$2.6 billion, followed by automotive sensor company RoboSense Technology (2498.HK), with about HK$1.1 billion in IPO proceeds. The rest of the market debutants came away with less than HK$1 billion each.

Persistently high interest rates and a global shift towards regulatory tightening have unsettled investors, making it harder for companies to achieve their desired valuation, said independent analyst Ivan Chow. “But the most important thing is that economic recovery is slow and industrial recovery is uneven,” he said.

Even so, there are some positives. Despite the relatively slim pickings, many investors could still enjoy first-day profits when the shares hit the market. In 20 out of 30 cases, the newly launched shares rose above their prospectus price in the first trading session, translating into an initial success rate of 66.7%. The best performer was WellCell Holdings (2477.HK), a provider of network support and other services to China’s telecom sector, whose share surged 164% on the debut day. Hong Kong construction firm WK Group (2535.HK) took second place with a gain of 136%. Six other companies logged a rise of more than 30% on their first day of trading.

The company with the biggest IPO, Sichuan Baicha Baidao, was one of the first-day as the price fell nearly 27% on the debut day in April and has had a bumpy ride since then.

The performance of other new stocks has also been mixed. As of July 5, the biggest gainer among the 30 newcomers was car tracking firm Changjiu (6959.HK) with a rally of 380%. The biggest loser with a drop of 52.4% was Tianjin Construction Development Group (2515.HK). Fifteen other new entrants have seen their stock fall below the IPO price.

Hong Kong authorities have been easing the IPO rules to drum up more business from new listings. In March last year Hong Kong Exchanges and Clearing (0388.HK) launched its Chapter 18C clause, relaxing profit and market cap requirements for specialist start-ups in cutting-edge sectors. The rule change has opened the door to more companies in fields such as information technology, advanced hardware, advanced materials, new energy, energy conservation and environmental protection, or food and agricultural technology.

AI drugs researcher QuantumPharm (2228.HK) was the first company to take the new IPO route. The company raised about HK$990 million, with a 10% share premium on the first day of trade. Black Sesame Technologies, a provider of smart car solutions,is on track to become the second Chapter 18C stock. The company has passed its listing hearing and is reported to be seeking up to HK$2.3 billion, with Xiaomi Corporation (1810.HK) as one of its shareholders.

The Hong Kong IPO market is likely to fare better in the second half, as an anticipated drop in U.S. interest rates sends capital back towards Hong Kong, according to predictions from accounting firms.

PwC HK is cautiously optimistic about the , forecasting that the 2024 IPO tally will reach 80 companies and a total value of HK$70 billion to HK$80 billion if the market mood keeps improving. The prediction is based on more than 100 listing applications, including filings from big companies, with candidates from sectors such as information technology, telecoms, artificial intelligence, retail, consumer goods and services.

Deloitte China arrived at a similar of 80 Hong Kong IPOs for the year, putting the capital amount at between HK$60 billion and HK$80 billion. Edward Au, managing partner for Deloitte China’s southern region, said a stimulus-driven recovery in China and U.S. rate cuts later in the year should bolster investor confidence, attracting capital back to Hong Kong, which would improve liquidity and valuations.

Meanwhile, both Ernst & Young (EY) and KPMG tipped Hong Kong to return to the top five global IPO hotspots, as listings are more active there in the second half of the year. KPMG said Hong Kong authorities have been promoting links with the Middle East, which could generate new listings in addition to demand from mainland Chinese companies. Market watchers are keeping an eye out for a potential secondary listing by oil giant Saudi Aramco, which would be a big deal for the Hong Kong financial scene.

The second half could see a string of bigger listings from the likes of appliance maker Midea Group, ride-hailing company Caocao Chuxing, bottled drinks maker China Resources Beverages, jewelry chain Zhou Liu Fu and Hozon Auto, which produces electric cars under the Neta brand, said analyst Chow. In looking for short-term yield, it would be wise to go for companies with big-name sponsors such as CICC International, China Securities or Haitong International, he said.