Hong Kong is losing some of its luster as an IPO hub, hit by market worries about soaring inflation, rising interest rates, tumbling stock prices and China’s zero-Covid policy. Some analysts say the exchange has little chance of landing a top-three place for global IPO fundraising this year

Key Takeaways:

  • As of the third quarter of this year, the world’s top three IPO capital raisers were the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Korea Exchange, with Hong Kong lagging in fourth place
  • Some analysts believe that a wave of first-day price drops by star IPOs has curbed investors’ appetite for new shares

By Ken Lo

Hong Kong used to reliably come first in the global IPO fundraising stakes, but the contest has gotten tougher for the onetime champion. This year the exchange will struggle to make it into the top three places for new share listings, as other Asian bourses pull out in front.

Back In 2019 the Hong Kong Stock Exchange reigned supreme in the global IPO arena, with nearly HK$309 billion ($40 billion) of fundraising. But the direction has been downhill from there, as the exchange slipped to second place in 2020 and fell out of the top three a year later, ranking only fourth.

In fact, Hong Kong tumbled as far as a lowly 9th place in the first half of the year as IPO activity slackened. But the exchange clawed back to fourth place by the end of the third quarter, boosted by the return of Chinese stocks from the U.S. such as Tuya Inc. (TUYA.US; 2391.HK), Miniso Group (MNSO.US; 9896.HK) and Noah Holdings (NOAH.US; 6686.HK) and by other bumper IPOs such as Tianqi Lithium (9696.HK) and CTG Duty Free (1880.HK).

Why has the Hong Kong Stock Exchange, once the king of the IPO market, lost its crown?

The global stock market has been unusually volatile this year, with IPO fundraising shrinking by more than half from last year’s levels due to the global economic slowdown, the strength of the U.S. dollar, and geopolitical risks. By the end of September, a total of 992 IPOs had been completed worldwide this year, raising $146 billion, according to data from Ernst & Young China. That was down 44% in quantity terms and represented a 57% fall in proceeds from the year-earlier period.

Still, China’s IPO market stands out as a bright spot in this muted picture. The stock exchanges in Shanghai and Shenzhen raised $74.5 billion in total, amounting to almost half the global fundraising figure and making them the two most active markets so far this year.

Fourth place so far for Hong Kong

How about the Hong Kong IPO market? Statistics from Bloomberg show that as of Sept. 22 this year, the Hong Kong Stock Exchange had raised $7.75 billion in IPOs, accounting for only 7% of Asia’s total fundraising of $108 billion. That was Hong Kong’s lowest share since 1999, when it contributed 6% of the region’s total.  Hong Kong’s status as a top Asia IPO hub is on the wane.

Listings from MTT Group Holdings (2350.HK), Leapmotor Technology (9863.HK) and Onewo Inc. (2602.HK) in the last week of September helped push Hong Kong’s IPO tally to $9.04 billion for the first three quarters. But that still leaves Hong Kong lagging in fourth place for new share sales, behind the Shanghai, Shenzhen and Korea exchanges. According to Bloomberg, even if Hong Kong’s IPO fundraising jumps by another $4 billion in the fourth quarter, its share of Asia fundraising will still be the smallest since 1999.

Newly launched shares have generally struggled as global stock markets including Hong Kong have been falling, as illustrated by an unusually high number of debut-day declines.

Taking newcomers MTT Group, Leapmotor Technology and Onewo Inc. as examples, the companies’ share prices were languishing around 11% to 45% below their IPO prices as of Monday. Investors have naturally been deterred by the underwhelming performance of the new stocks. That’s probably why FWD Group, which was seeking a large amount of capital, is reported to have shelved its offering until the first quarter of next year.

Meanwhile, Weilong Delicious, the Chinese maker of apopular spicy snack, has passed the listing hearing and may go public in October, but its fundraising target of $500 million is not enough to help the Hong Kong Stock Exchange make up the lost ground in the IPO stakes.

Hong Kong had been looking to benefit from an influx of Chinese firms departing from U.S. exchanges.  The market had estimated that nearly 300 New York-listed Chinese stocks would face the risk of delisting due to divergent auditing standards between U.S. and Chinese securities regulators.

To enhance its homecoming appeal, the Hong Kong Stock Exchange eased its rules on dual primary listings from January this year and lowered the threshold for the return of U.S.-listed Chinese stocks to Hong Kong. With greater flexibility for issuers seeking to list in both Hong Kong and the U.S., the market looked set to enjoy an IPO boom.

Absence of Big IPOs

However, some U.S.-listed Chinese companies have pressed pause on any plans to shift to Hong Kong, after a preliminary deal was struck between U.S. and Chinese regulators about the vetting of audits. The U.S. Public Company Accounting Oversight Board (PCAOB) has sent an audit team to Hong Kong to review the first batch of Chinese stocks. As a result, some companies are waiting for the audit results before making any listing decision, probably delaying any concerted move by Chinese stocks into Hong Kong until early next year.

Analysts expect investors to remain wary after new listings made weak Hong Kong debuts.

Kenny Wen, head of investment strategy at KGI Asia, noted that even star IPOs had faltered on their trading launch, including MTT Group, which plunged 27% despite being 150 times oversubscribed.

“Some companies, in view of the sluggish market conditions, would rather postpone their listing plans for fear of affecting the IPO valuation. And with no mega IPOs to be listed for the rest of the year, Hong Kong’s IPO market might not be able to return to the top three for the whole year,” Wen said.

The subdued IPO outlook was shared by Francis Lun, CEO of GEO Securities, as international firms back out of listing plans to avoid getting disappointing valuations, in the face of worries about the global political and economic climate, Hong Kong’s listless market and the impact of China’s zero-Covid policy.

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