Asia Corner: Hong Kong IPO Market Hits

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Starting in early January with the fifth Covid-19 wave, the Hong Kong financial market has been hit with a steady stream of punches this year.

Three months of strict social distancing restrictions led to a sizable cut back on much of the local business activity causing the overall economy to shrink by four percent in the first quarter. Compounding the pressures of the local economic struggles are heightening geopolitical tensions and increasing interest rates resulting in the Hang Seng Index down around 9% YTD as of June 20th.

Adding to the challenges of Asia’s most popular fundraising venue, just 22 companies listed in the first half of the year, with only one IPO competed in May. Total proceeds raised were HK$17.1 billion, representing a 92 percent plunge in proceeds raised from the first half 2021. JL Mag Rare Earth, a producer of permanent-magnet materials, has been biggest Hong Kong IPO so far in 2022, raising over US$500 million in January.

The IPO drought is due to a combination of China’s sharp economic slowdown, new regulatory framework for overseas listings and companies choosing to postponed their listing due to the weaker secondary markets. Insurance group FWD delayed its US$1bn Hong Kong initial public offering stating volatile market conditions as the cause.

Highlighting the IPO market uncertainties is the impact of Beijing’s ongoing technology crackdown. Following last year’s tech crackdown and the blow to the Didi Chuxing IPO, China is putting more scrutiny on Chinese companies offshore listing plans as it revises its overseas listing rules. In December 2021, the China Securities Regulatory Commission (CSRC) released new rules for overseas IPOs including Hong Kong, requiring all Chinese companies pursuing overseas IPOs to file with the CSRC. As part of the new draft regulation, companies can still list overseas as variable interest entities if they meet compliance rules, a sign that China is trying to avoid financial decoupling from the US.

JD Technology, the fintech, cloud and AI arm of Chinese e-commerce company JD.Com, is one of the first high profile IPOs to be impacted by the new regulations. The company hoped to lodge its IPO filing in Hong Kong by the end of March followed by an IPO later this year. However due to the updated domestic regulatory approval requirement, it has been forced to delay its plans to raise up to US$2 billion as it waits to secure regulatory approval from the CSRC. Full Truck Alliance Co Ltd, China’s ‘Uber for trucks’, plans to raise US$1 billion in a secondary Hong Kong listing this year have also been paused as the company waits for the Chinese cybersecurity regulator to announce findings of a probe into the company. The company raised US$1.68 billion in a US IPO last year.

Additionally, companies like Ximalaya and Green Tea Group are taking a wait and see approach to their IPOs. Ximalaya, China’s largest online podcasting platform, scrapped its US IPO plans after China implemented new regulatory rules targeting technology firms. The company filed its IPO application in Hong Kong last September but has re-evaluated its IPO plans while Chinese fusion cuisine restaurant, Green Tea Group, pushed back its plans to raise US$150 million in March amid the increasing poor market conditions.

Considering the poor IPO performance in the first half of the year, PwC cut its full-year IPO forecast for in Hong Kong to US$23.4 -US$26 billion down from its forecast at the beginning of the year of US$45.5 – US$52 billion. The number of deals PwC expects is now 80, down from 120 with three to four companies raising more than HK$10 billion each in the second half as the market gradually regains momentum. Homecoming listing are anticipated to remain a theme through 2024 as US regulator have flagged a total of 149 US-listed Chinese companies for failing to meet the audit regulations. These companies will be required to delist from the US market as early as 2024 if they fail to meet the regulations contained in the Holding Foreign Companies Accountable Act (HFCCA). The first delisting of non-compliant foreign stocks is expected to start in late 2023.

Hong Kong’s IPO pipeline for the second half of 2022 includes one of China’s top lithium producers, Tianqi Lithium Corp. The company is looking to raise up to US$1.2 billion in what could be the biggest initial public offering this year. Listed on the Shenzhen Stock Exchange, Tianqi Lithium was ranked third in terms of revenue generated from lithium globally in 2020, according to a report from data analytics firm Wood Mackenzie.

In June, Baidu backed Chinese electric-vehicle maker, WM Motor, filed for an IPO in Hong Kong as it looks to raise up to US$1 billion, according to Bloomberg. WM Motor plans to deliver affordable EVs on mass scale. Its first model, a sport utility vehicle starting at 160,000 yuan, nearly US$24,000, became a best-seller in its price segment after its launch in 2018. Hangzhou-based Leapmotor applied in March this year to raise up to US$1billion through a Hong Kong IPO. The company targets the mid- to high-end segment with its smart EVs. EV companies have become highly attractive since China is promoting cutting carbon emissions with its plan to achieve carbon neutrality by 2060.

Re-routing its original plan for a U.S. listing, Tencentbacked Tuhu, an online automotive service platform in China, filed for an IPO in Hong Kong to raise up to US$400 million. China being home to the world’s largest car market, makes it a fertile ground for development of an aftermarket offering services for the millions of cars on its roads.

Joining the wave of homecoming listings, Chinese EV start-up Nio and KE Holding completed its Hong Kong listing by introduction without raising any money this spring. Companies that seek a listing by introduction are able to do so because their existing shares are already widely held and have an open market for their shares after the new listing. Q&A platform akin to Quora, Zhihu, made its homecoming in April, raising US$106 million in a Hong Kong. Since new reforms introduced in 2018 to allow companies with multiple classes of voting rights and biotechnology companies without any revenue to list in Hong Kong, the Hong Kong stock exchange has seen significant growth in new economy and biotech listing. It is now the world’s second-largest biotechnology fundraising hub with 93 IPOs that raised a total of HK$258.5 billion. It has also listed 198 new economy companies that have raised a total of HK$853 billion, representing 26 per cent of the exchange’s daily turnover. Being the IPO destination for China’s new economy and biotech companies, the Hong Kong Stock Exchange is considering new listing reforms to allow pre-revenue tech giants start-ups to raise funds.

The Hong Kong exchange is dominated by mainland companies with 80 percent of total market capitalization represented by the mainland and seven of the top 10 Hang Seng Index constituent stocks are mainland companies. With the sheer size of China’s economy and the preference of Chinese firms to raise capital internationally, Hong Kong’s IPO prospects are expected to bounce back as the city remains an important “venue that bridges China with the rest of the world.”

Ms. Leslie Richardson has over 20 years of investment management and equity research experience. She operates a boutique investor relations firm in Hong Kong for Asian companies listed in the U.S. and Hong Kong. She also assists private companies develop investment material and build an investor following in preparation for a public listing. Additionally, she is the Asian Correspondent for Micro-Cap Review, www.microcapreview.com, a financial magazine focused on mirco-cap companies. Previously, she worked for CCG Elite in assisting Asian-based, U.S. listed clients formulate key communication strategies. Ms. Richardson began her investment career at U.S. Trust Company then went on to join Odyssey Advisors as a portfolio manager and Director of Research. Ms. Richardson specialized in high growth sectors such as bio-tech, alternative energy, IT and telecommunications. She earned her M.B.A. from the University of Southern California. Ms. Richardson is based in Hong Kong. www.elite-ir.com.