Hong Kong’s largest initial public offering of the year this week is a welcome boost for the city but is unlikely to overcome the geopolitical tensions and lack of policy clarity that have deterred investment in what was once the world’s largest IPO venue.
As of mid-September, the total IPO deal value in Hong Kong stood at only USD 7.77 billion, the lowest since 2013. That volume is expected to be boosted by Thursday’s IPO from Leapmotor, which is likely to be the biggest public debut by a Chinese electric vehicle maker. But the USD 1.03 billion that the listing could raise is still overshadowed by the USD 6.23 billion IPO on the same bourse by Chinese tech company Kuaishou last year.
Overall Hong Kong, the world’s top IPO market as recently as 2019, by mid-September only had about one-fifth of the value of offerings in 2021. And few expect the market to come back to a similar level soon.
“I think the key challenge that it is facing right now is really very poor sentiment,” said Gary Ng, a Hong Kong-based economist for Natixis. So far this year, the Hang Seng Index is down more than 20%, hitting investors’ confidence in the market.
The drop in the market is deterring companies from seeking listings at valuations lower than they hope for.
Hong Kong is not the only market where volumes have dropped significantly amid fears for the global economic outlook. But Hong Kong’s IPO market is also being affected by uncertainty ahead of China’s upcoming Communist Party congress, which will set the economic and political direction in the mainland. Hong Kong is also feeling the consequences of poor relations between China and the US, as well as its own economic downturn caused by strict COVID policies—though the end of hotel quarantine, announced by city authorities on Friday, should bolster hopes that business will bounce back.
William Chow, Hong Kong-based deputy CEO for Raffles Family Office, which has invested in pre-IPOs of mainland technology and electric vehicle companies listed in both US and Hong Kong bourses in the past two years, said the group saw returns of five to six times from those early-stage investments.
Chow doesn’t expect the same level of return when another company in which the family office is invested goes public, which could be next year. Global uncertainty due to geopolitical events and a lack of clarity around a full opening of Hong Kong are two key factors impacting the city’s IPO market, he added.
Only 8% of the Hong Kong IPOs as of August were oversubscribed, compared to 90% in the same period of 2021, suggesting a huge dip in investor interest, a recent report from Deloitte shows.
Nicolas Aguzin, chief executive of the Hong Kong Exchanges and Clearing, said in the company’s half-year earnings call in August that he expected current geopolitics, market volatility and an environment of rising interest rates would continue. Cash trading volume would be impacted by “global market sentiment,” he said. The exchange posted a 27% fall for the first six months this year.
Expectation of the so-called homecoming of US-listed Chinese companies, amid tension between Beijing and Washington over access to information from audits, was supposed to benefit the Hong Kong bourse. But that view may not be so straightforward.
A team of US auditing experts from Washington is now in Hong Kong looking at the work of big accounting companies that audit around 130 US-listed mainland companies. If the inspection team is not happy with what it finds, these Chinese corporations could be forced to delist from the US bourses.
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The audit could impact how issuers see Hong Kong as a destination, said Lyndon Chao, Hong Kong-based head of equities at Asia Securities Industry & Financial Markets Association. Should the audit encounter issues, that may not necessarily be good for Hong Kong, he added. “I think that may just exacerbate the tensions between the US and China, as this may be viewed very much through a political lens.”
Companies delisted might not necessarily seek Hong Kong as an alternative, as they are not fully immune from the geopolitical tensions, Natixis’ Ng said. These companies will also likely face losing some US investor money due to investment constraints, which could impact valuations, he added.
US investors might think twice about investing in companies that delist from the US and switch to Hong Kong, said Thomas Fung, Hong Kong-based CIO at China Rise Securities Asset Management. Some funds with mandates that restrict their investments in onshore-listed Chinese stocks might also refrain from investing in companies that delist in the US and move to Hong Kong, since in effect that could mean putting money into equities vetoed by the US Congress.
One senior executive for a Chinese company that plans an IPO in the US next year echoed the concern, citing a Beijing-imposed national security law in the territory in 2020. “Hong Kong, especially after the security law passed in 2020, is no longer seen as a safe haven for investors and as a result is seen as indistinguishable from China,” the executive said, declining to be named due to the sensitivity of the matter. The company has ruled out a Hong Kong IPO.
Investors in Hong Kong will also be looking to the upcoming congress of the Chinese Communist Party for guidance. That includes any indications of policies toward China’s technology and property sectors, which have remained among the top five by deal volume in the past five years in Hong Kong IPO, Dealogic data shows.
Investors are waiting for clarity around key regulations crucial for Chinese companies’ overseas listing, such as cross-border data sharing, Natixis’ Ng says.
The upcoming party congress will also indicate whether technocrats might gain power to help China refocus on economic priorities, or if a more socialist agenda might persist alongside the zero-COVID policy, said ASIFMA’s Chao. This will impact companies’ fundamentals as well as investors’ risk appetite, he added.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.