The Hong Kong Stock Exchange in Hong Kong, China, on Wednesday, July 13, 2022.
Paul Yeung | Bloomberg | Getty Images
Hong Kong's largest IPO so far this year flopped last week suggesting the market still needs time to rebound, despite positive signs pointing to a recovery.
The offering raised $675.2 million, but shares of KKR & Co.-backed Chinese liquor company ZJLD Group plunged nearly 18% on their first day of trading on April 27.
"The sentiment in the IPO markets has not built up yet," Ringo Choi, Asia-Pacific IPO leader atEY, told CNBC.
"A lot of industries are suffering at the moment," said Choi, noting that tech companies are facing pressure from U.S.-China tensions and falling electric vehicle prices, among other setbacks.
"Valuations at this moment have not picked up as compared to two to three years ago. We still need some time," said Robert Lui, Hong Kong offering leader of Deloitte China's Capital Market Services Group.
Hong Kong's stock market was among the worst-performing last year, shedding 15% in 2022 for its third-straight year of declines.
Besides high inflation and rising rates globally, stocks were also weighed down by Beijing's zero-Covid strategy and a property market slump in the city. Chinese companiestend to launch secondary listings in Hong Kong as another venue to access investors and capital.
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Irene Chu, partner at KPMG China, said the "underlying economy is not doing well."
"The concern is still about the high interest rate environment and a lot of the attention in the Greater China region is about the recovery of the economy," said Chu.
Hong Kong's two largest IPOs in 2022 sunk in their trading debuts. Chinese automobile manufacturer Zhejiang Leapmotor slumped 34% while property management service provider Onewo slid almost 7%.
The Hong Kong IPO market also started 2023 at a slow pace. In the first quarter of 2023, the city hosted 18 IPOs raising 6.6 billion Hong Kong dollars ($840 million), versus 15 IPOs raising HK$13.6 billion in the same period a year ago, according to Deloitte data. While deal volume rose 20%, deal value plunged 51%.
"This slow performance is in line with our forecast. It will take time for business and economic activities, especially between the Chinese Mainland and Hong Kong, to fully revive after the reopening of the boundaries, and eventually market valuations and IPO activity will follow suit," said Lui in a Deloitte China Q1 2023 report.
Bullish for 2023
Still, analysts at Deloitte China, EY and KPMG are bullish and expect the full reopening of Chinese and Hong Kong borders as well as relaxed listing rules to revive the market in 2023. In March, Hong Kong lowered the market capitalization threshold for advanced tech firms to list.
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Those analysts also expect the upcoming IPOs of Alibaba's business units to lift the Hong Kong stock exchange this year.
The Chinese tech giant broke into six separate units so that each unit, except Taobao Tmall Business Group, can pursue individual listings — a signal that the Chinese government is softening its grip on tech giants. Its logistics arm Cainiao and grocery business Freshippo are reportedly among the first units to go public. Alibaba has not directly confirmed these plans.
Deloitte's Lui told CNBC that the "current market is much better as compared to the fourth quarter of 2022," with the potential deals that are looking to launch on the Hong Kong bourse.
"[The Alibaba spinoff] will definitely improve the market sentiment and that's why we forecasted that September to December will be better," said EY's Choi.
"We expect second half of 2023 to be an exciting time for the Hong Kong IPO market with expectations of the end of U.S. interest rate hikes leading to a repositioning of funds' investment strategies to Asia's high-growth regions like China,"Edward Au, Southern Region managing partner at Deloitte China, said in the firm's first quarter China report.
Deloitte's Capital Market Services Group forecasts that in 2023, Hong Kong will see 110 new listings raising about HK$230 billion ($29 billion).
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I'm well-versed in financial markets, particularly IPOs and stock exchanges. The Hong Kong Stock Exchange (HKEX) has seen significant activity and challenges recently. The IPO market, highlighted by the flopped IPO of ZJLD Group, emphasizes the current sentiment of caution and skepticism in Hong Kong's market. This IPO raised $675.2 million but experienced an 18% plunge on its first trading day, indicating a lack of confidence among investors.
Ringo Choi, Asia-Pacific IPO leader at EY, and Robert Lui, Hong Kong offering leader of Deloitte China's Capital Market Services Group, provided insights into the market's struggles. They pointed out industry-wide challenges, such as tensions between the U.S. and China impacting tech companies, alongside declining electric vehicle prices, all contributing to subdued valuations compared to previous years.
Factors contributing to Hong Kong's market downturn include the broader economic conditions like high inflation, rising global interest rates, Beijing's zero-COVID strategy, and a local property market slump. Chinese companies sought secondary listings in Hong Kong amid these conditions, highlighting the importance of the city as an alternative market for raising capital.
In 2022, Hong Kong's stock market faced its third consecutive year of decline, with major IPOs like Zhejiang Leapmotor and Onewo debuting poorly. Even in early 2023, the market struggled, hosting fewer IPOs and witnessing decreased deal values despite a slight increase in deal volume.
However, optimism prevails among experts from firms like Deloitte, EY, and KPMG. They anticipate a market revival in 2023, citing the expected full reopening of borders between Hong Kong and mainland China, coupled with relaxed listing rules. Notably, the division of Alibaba into separate units, with potential IPOs for units like Cainiao and Freshippo, reflects a potential shift in Chinese government attitudes towards tech giants, likely buoying market sentiment.
Deloitte's forecast for 2023 anticipates about 110 new listings in Hong Kong, raising an estimated HK$230 billion. Analysts foresee a more favorable second half of the year, expecting funds to reposition investments in Asia's high-growth regions like China once U.S. interest rate hikes cease.
These assessments align with Hong Kong's long-term significance as a financial hub, showcasing its resilience despite short-term challenges. The outlook remains positive for a resurgence in IPO activities, contingent on geopolitical developments and macroeconomic factors influencing investor sentiment.
