By John Loh
To see what’s going on in Hong Kong’s IPO market, it makes sense to look beyond the headline numbers.
True, there were more initial public offerings in 2017, but they were much smaller in size: 131 transactions worth $12.6 billion to the start of December, according to Dealogic, versus 103 listings worth $20.5 billion in the same period the year before.
But no serious equity banker would dream of turning back the clock. Far too many IPOs in the last two years got over the line on artificial demand and pumped-up valuations, given their Chinese state-owned heritage.
Many market participants feared Hong Kong was destined to become a graveyard for the IPOs of boring, illiquid Chinese companies and me-too banks and brokerage houses.
But the city’s IPO market has undergone a marked shift and has discarded many of those awful habits.
The changes probably started around the time of WuXi Biologics’ listing in the middle of 2017. The deal earned praise from bankers for its solid execution and because it ushered in the return of international institutional investors to Hong Kong equity issuance.
A procession of internet technology and Chinese new-economy IPOs have followed since, giving the city’s bourse its first wildly successful share debuts in years.
Those deals not only captured the imagination of the global investor community, but also of potential issuers, expanding the limits of what is possible in Hong Kong’s equity capital markets.
Some would argue this is only a cyclical shift and that such deals were only possible thanks to the rising tide of global equity prices. But there is enough evidence to show the changes are structural.
For starters, the tech names that have listed this year in Hong Kong offer a taste of what is to come.
The euphoria for shares in China Literature, Razer, Yixin Group and ZhongAn Online P&C Insurance Co — several of which eschewed cornerstone investors to optimise liquidity for institutional investors — undoubtedly sets a strong base for 2018.
Tencent-backed China Literature, possibly the hottest Chinese IPO since Alibaba Group Holding, was so heavily oversubscribed that it caused a spike in Hong Kong’s interbank borrowing rates. That was before the shares raised $1.1 billion and then doubled on their debut.
But the fact that the pipeline is growing stronger by the day is proof that this is not just a momentum story.
Names such as Dianrong, Lufax and WeLab are likely to top 2018’s fintech listings in Hong Kong.
Health-tech firms such as Ping An Good Doctor and WeDoctor Group are also reported to be planning IPOs, while mobile-phone maker Xiaomi is another listing hopeful.
This new breed of issuer is what investors want a piece of now. China has marched to the forefront of artificial intelligence and big data, and its entrepreneurs have followed suit.
If the previous wave of Chinese tech IPOs in New York was dominated by e-commerce players such as Alibaba, then the latest crop of listing hopefuls will be defined by their embrace of the internet and mobile to disrupt absolutely everything.
Dual-class
Hong Kong will steal even more thunder from the US exchanges if it can push through a long-standing – and controversial – plan to introduce weighted voting rights.
If regulators were a roadblock before, those at the highest echelons of government now seem intent on pushing the agenda through. The Hong Kong Stock Exchange is expected to unveil a new proposal to implement dual-class shares soon.
The proposal is likely to drop an earlier plan to create a separate board for companies with dual-class shares and instead integrate them into its main board, which would give China’s biggest tech unicorns the prestige of listing on Hong Kong’s flagship market.
If the plan extends to allowing flotations of loss-making or pre-revenue companies, many of which have taken their business to the US thanks to regulatory arbitrage, all the better.
Hong Kong will continue to be the preferred listing venue for the big Chinese state-owned firms seeking international expansion. China Tower, Sinopec Marketing Co and China Great Wall Asset Management are just some of the names eyeing jumbo IPOs in the city next year.
But they will be the icing on the cake, as investor appetite has already shifted in favour of the new class of issuers.
The tide has turned for Hong Kong IPOs.