Hong Kong IPOs grew during the first six months of 2019, thanks to new listing rules for biotech companies and despite political concerns over the city’s relationship with China and the outbreak of protests.
Sixty-eight companies went public on the Stock Exchange of Hong Kong, the highest number in the last five years, and up around 40 percent on the same period last year, according to financial consultancy KPMG.
Hoshiyuki Takahashi, manager of KPMG China’s Hong Kong team, attributes the jump to new and looser listing rules for biotechnology companies, which allow pre-revenue businesses to list their shares.
‘Hong Kong aims to increase [the number of] innovative companies that float in its market and make clear its strength as a financial hub when compared with other markets like Shenzhen or the US,’ Takahashi says in a statement. ‘With this deregulation of biotech firms, Hong Kong wants to attract companies with more technical prowess.’
In a dramatically game-changing move for Hong Kong, Chinese tech giant Alibaba, which is already listed on the NYSE, is now preparing for a secondary listing in Hong Kong – a development that is likely to have the positive knock-on effect of even more companies considering the market.
In addition, Paul Lau, head of capital markets at KPMG China, says the Hong Kong Stock Connect – the cross-border system between the stock exchanges in Hong Kong, Shanghai and Shenzhen that enables mainland investors to trade Hong Kong-listed stocks – has become a big factor in the decisions of Alibaba and other potential companies to list in Hong Kong. The system allows them to tap into a large pool of individual investors in mainland China that otherwise cannot purchase their stocks.
Nevertheless, concerns have grown over Hong Kong’s position in relation to Beijing, generated by a controversial extradition bill that would allow people to be moved from the city to the mainland, with millions of residents having taken to the streets in protest. The turmoil prompted real estate developer ESR Cayman to cancel its HK$9.76 bn ($1.24 bn) listing.
But according to Toshihiro Kawamura, director of the Hong Kong team for KPMG Asia’s listing advisory group, the political turmoil from the protests has yet to have an impact on Hong Kong’s capital markets. ‘The effect of the intensified relationship between Washington and Beijing has also yet to cause any major blows,’ he adds, noting that the reverse is true, as the number of companies gearing up for an IPO in Hong Kong ‘remains high – at around 190.’
If Hong Kong’s main exchange is combined with its Growth Enterprise Market (GEM) – the market for smaller companies – the number of IPOs totals 74 for the first six months. Although this is still down 24 percent on last year’s 98, overall proceeds are close to HK$18 bn. KPMG attributes a GEM regulatory change for the overall decline.
The market implemented new requirements for companies seeking IPOs and future transfers to the main exchange, resulting in start-ups reconsidering where to float. ‘We expect the new listings [on GEM] to remain low going forward,’ observes Louis Lau, a partner in KPMG’s capital markets advisory group in Hong Kong.
Hong Kong does face more competition from China as Beijing takes active steps to boost the attractiveness of mainland markets. Last month China launched its new Science and Technology Innovation board – Beijing’s version of the Nasdaq – which it wants to use to spur investment in domestic tech companies, especially as the trade war with the US has become something of an important face-off over new technology.
If China continues to open its market to start-ups, this could impact on Hong Kong IPOs. But Kawamura argues that many start-ups will still prefer Hong Kong: ‘China’s IPO market, including its pipeline, is still heavily controlled by the government – while Hong Kong is more stable.’
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