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Hong Kong IPOs surge 40% in first half despite political turmoil

Analysts expect looser rules on biotech companies to maintain momentum

Hong Kong market watchers expect a strong run of IPOs in the second half of 2019. (Photo by Ken Kobayashi)

TOKYO/HONG KONG -- Initial public offerings in the Hong Kong market surged during the first six months of 2019, despite concerns about the city's relationship with mainland China and the outbreak of mass protests.

Nearly 70 companies went public on the Hong Kong stock exchange's main board, the highest number in the last five years, according to financial consultancy KPMG. The tally was up about 40% from the same period a year earlier.

Hoshiyuki Takahashi, manager of KPMG China's Hong Kong team, attributed the jump to new, looser listing rules for biotechnology companies. The change allows pre-revenue businesses to list their shares.

"Hong Kong aims to increase innovative companies that float on their market, and make clear their strength as a financial hub when compared to other markets like China's Shenzhen or the U.S.," Takahashi said. "With this deregulation toward biotech firms, Hong Kong wants to attract companies with more technical prowess."

Chinese e-commerce giant Alibaba Group Holding, which already trades on the New York Stock Exchange, is now preparing for a secondary listing in Hong Kong -- a move that could encourage even more companies to consider the market.

Analysts are convinced Hong Kong will remain a strong IPO market in the latter half of 2019.

Ernst & Young expects a stable year for the market, noting in a report that the full circulation of H shares -- shares of mainland companies that are listed in Hong Kong and can be purchased by anyone regardless of nationality -- will be fully implemented soon. This is "conductive to attracting mainland enterprises to go public in Hong Kong."

Paul Lau, head of capital markets at KPMG China, said the mainland-Hong Kong Stock Connect -- a mechanism that enables mainland investors to trade Hong Kong-listed stocks -- has become a big draw for Alibaba and other companies. The system allows them to tap into a large pool of individual investors in mainland China who otherwise cannot purchase their stocks.

On the other hand, concerns loom over Hong Kong's position in relation to Beijing, sparked by a controversial extradition bill proposal that would allow people to be transferred from the city to the mainland. Millions of residents have taken to the streets in protest.

In June, the turmoil prompted real estate developer ESR Cayman to cancel its 9.76 billion Hong Kong dollars ($1.24 billion) listing. But analysts say the financial market has yet to suffer any serious consequences.

Nor has the U.S.-China trade war had much of an impact.

"The effect of the intensified relationship between Washington and Beijing also has yet to cause any major blows," said Toshihiro Kawamura, director of the Hong Kong team for KPMG Asia's listing advisory group. He added that the number of companies queuing up for an IPO in Hong Kong "remains high, at around 190."

Analysts did acknowledge that while the political turmoil has yet to cause long-lasting damage, if it leads to actual regulatory changes, "then that's a whole other story," as Yutaka Yuguchi, partner in the KPMG Asia listing advisory group.

Meanwhile, if Hong Kong's main board is combined with its growth enterprise market board, known as GEM -- which is mainly for smaller companies -- the number of IPOs totaled 74 as of June 26. This was down 24% from last year's 98, though proceeds jumped close to HK$18 billion ($2.3 billion).

Louis Lau, a partner in KPMG's capital markets advisory group in Hong Kong, blames a GEM regulatory change for the overall decline. The market implemented new requirements for companies seeking IPOs and future transfers to the main board, prompting startups to reconsider which exchange to float on, Lau said. There were 50 new listings on the GEM board in the first half of 2018 but only six during the same period this year.

"We expect the new listings [on GEM] to remain low going forward," he added.

Hong Kong also faces more competition as China takes proactive steps to boost the attractiveness of mainland markets.

Last month, China officially launched its new technology innovation board, often referred to as Beijing's version of the Nasdaq exchange. The country wants to spur investment in domestic tech companies, especially as the trade war with the U.S. increasingly becomes a rivalry over technology.

If China continues to open its market to startups, this could conceivably affect Hong Kong IPOs.

"It is cheaper to list in mainland China than Hong Kong," noted Xiao Minjie, managing partner at Japan-China mergers-and acquisitions advisory AIS Capital.

Compared with Shanghai's new tech board, Hong Kong's standards for listings are also higher and harder to meet, said Nobuaki Kitagawa, managing director of CyberAgent Capital in Shanghai. "The consensus remains that a company should have revenue of around 100 billion yen ($928 million) to list in Hong Kong," he said.

Still, KPMG's Kawamura argued that many startups might still prefer Hong Kong because "China's IPO market, including its pipeline, is still heavily controlled by the government while Hong Kong is more stable."

As the two markets become more open, companies face the task of weighing which market will better attract investors and support their growth.

Across Asia, data from Dealogic shows the overall number of IPOs dropped in the first half of 2019. Excluding Japan, the region had 260 new listings, a 28% decrease from the 362 recorded last year. Deal value also declined nearly 30% to $21 billion.

India's new listings plunged 66%, to 35, while Singapore had eight, a slight drop from last year's nine.

Nikkei staff writer Coco Liu in Hong Kong contributed to this report.

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