Mainland China and Hong Kong stock exchanges are poised to record their most active year since 2011 in terms of IPO proceeds, predominately due to a surge in activity on Shanghai’s STAR Market and Hong Kong’s main board.
The cumulative proceeds from IPOs in China and Hong Kong are expected to be $118.7 billion this year, according to a report released by KPMG China on Thursday. That amounts to 45.1 per cent of global IPO proceeds, and a 54 per cent increase from 2019.
The Hong Kong Stock Exchange (HKEX), the Shanghai Stock Exchange (SSE, comprising Shanghai’s main board and the Nasdaq-style STAR Market), and the Shenzhen Stock Exchange (SZSE) will claim the second, third, and fifth places, respectively, in the global ranking by expected IPO proceeds for 2020, .
The three stock exchanges are expected to register $50.3 billion, $49.9 billion, and $18.5 billion respectively in total IPO proceeds in the ongoing calendar year.
Nasdaq will overtake the HKEX this year to reclaim its position as the world’s leading IPO hub with $53.5 billion in proceeds. (The number was compiled before the IPOs of vacation rental service Airbnb, and food delivery startup DoorDash, which raised $3.5 billion and $3.37 billion respectively this week.)
Despite COVID-19, the Shanghai and Hong Kong bourses emerged as key drivers behind the 23 per cent year-on-year surge in proceeds raised in the global IPO market in 2020.
Stock exchanges in the two cities witnessed the world’s top three biggest IPOs this year, namely chipmaker Semiconductor Manufacturing International Corp (SMIC)’s $7.5 billion IPO on the STAR Market in July; e-commerce giant JD.com’s $4.5-billion secondary listing in Hong Kong in June; and Beijing-Shanghai High Speed Railway’s $4.4 billion Shanghai IPO in January.
(The report has ranked JD Health’s Hong Kong IPO ahead of Snowflake’s $3.9 billion debut on the New York Stock Exchange in September, as it was prepared before JD Health completed its $3.48-billion listing on December 2.)
Pipeline of over 800 IPO hopefuls in mainland
Over the course of 2020, the SSE and the SZSE are on the track to achieve an over 80 per cent increase in terms of funds raised compared to 2019, amassing a combined $68.4 billion from 383 IPOs.
Shanghai’s STAR Market, in particular, has contributed to 47 per cent of the funds raised in the mainland IPO market, which is also known as the “A-share market.”
STAR Market, which started operations in July 2019 as China’s first attempt to adopt a more market-driven, registration-based IPO system, has hosted the listings of 200 firms with a combined market cap of 3.1 trillion yuan ($473.6 billion) as of December 9, according to official statistics. These stocks are trading at about 92.5 times earnings on average.
“The A-share market had a deepened capital market reform with the expansion of registration-based IPOs this year amid China’s focus to foster a multi-level capital markets system,” said Louis Lau, Partner of Capital Markets Advisory Group at KPMG China. “This would further increase market inclusiveness and coverage,” he added.
There were also “deep capital market reforms” with Shenzhen’s startup board ChiNext in August 2020. Similar to the STAR Market, the ChiNext Board employs a streamlined system wherein IPO candidates no longer need approval from the country’s stock market watchdog China Securities Regulatory Commission (CSRC), thus greatly shortening the waiting period.
The first batch of 18 companies debuted on the reformed ChiNext Board in late August.
“We expect the performance of China’s A-share market to continue to be strong in 2021, primarily due to the strong pipeline we have seen,” said Lau. “As of now, there are over 800 companies in the IPO pipeline (as of December 6). Over half of them are waiting for a green light to go public on either the STAR Market or the ChiNext Board.”
Across stock exchanges in the mainland, the technology, media, and telecom (TMT) industry will remain as the top sector in terms of the number of IPOs. It could account for 34 per cent of IPOs by volume in 2020, compared to 28 per cent in 2019.
Industrials will come second at 25 per cent. As a traditional sector in the Asian market, industrials has always taken one of the top three positions.
What will change this year is the proportion of healthcare/life science IPOs. At 13 per cent, the healthcare/life science industry is expected to overtake the financial services industry.
IPOs in the financial sector accounted for 27 per cent of the total IPO number in 2019 after TMT (28 per cent) and more than industrials (22 per cent), primarily due to the launch of the STAR Market in July 2019. The tech-heavy stock exchange has enabled the listing of non-profit-making biotech companies, which was previously not allowed.
Homecoming trend to continue in 2021
Supercharged by homecoming and biotech listings, Hong Kong has seen a 24 per cent increase in total IPO proceeds in 2020 compared to the previous year. Benefiting from its diverse international investor base, the Asian financial hub is estimated to record a total of HK$389.9 billion ($50.3 billion) proceeds from 140 IPOs expected to complete by year-end.
The increase in fundraising is mainly attributable to homecoming IPOs of nine US-listed Chinese firms under the 19C Chapter, which the HKEX introduced in April 2018 to allow eligible companies to pursue a secondary listing on its main board. Following Alibaba’s $13 billion blockbuster listing in November 2019, the nine share sales collectively accounted for 34 per cent of the total funds raised in the city in 2020.
Homecoming of US-listed Chinese issuers is projected to gain traction amid Sino-US geopolitical uncertainties.
The US House of Representatives in early December passed “The Holding Foreign Companies Accountable Act.” The act, which is pending for President Trump to sign into law, will kick Chinese companies off US stock exchanges if they have failed to comply with US audit standards for three years in a row.
“I think this is something we have seen coming since May when it [the Act] was first proposed,” said Irene Chu, Partner & Head of New Economy & Life Sciences at KPMG China. “This has created more uncertainties for Chinese companies considering an IPO listing moving forward.”
“It is hard for us to predict what will come next because it has to do with the regulatory bodies between the two countries coming up with a solution,” said Chu. She added that Chinese companies already listed in the US will have multiple options available for them, such as privatisation or listings on another location.
Even so, the country’s IPO candidates’ interest in a US IPO does not seem to fade away, as Dealogic data shows that Chinese issuers already raised $9 billion in US IPOs between January and mid-October, compared with $3.5 billion in the entire 2019.
“The fact that there are still companies going for US IPOs is probably because they have comparable peer companies in the US, and they feel that they can get a better recognition,” said Chu. “I think individual companies do make their own decisions, despite what’s going on on the regulatory front.”
KPMG China forecasts that the number of IPOs in Hong Kong will be somewhere between 130 and 150 in 2021, raising combined proceeds of HK$350-400 billion ($45.2 billion to $51.6 billion) — comparable or slightly better than the results this year.
“While forecasting the number, we have taken into consideration that there will be more US-listed Chinese companies to pursue a secondary listing in Hong Kong,” said Lau.
“Having said that, most sizable companies have already completed their secondary listings in 2019 and 2020, like Alibaba and NetEase. The rest will not be as sizable as those, but they will still be of fairly good numbers, considering those [potential ones] in the pipeline that can satisfy the requirement of a secondary listing in Hong Kong.”
Based on Hong Kong’s current secondary listing requirement of a minimum market cap of HK$10 billion ($1.3 billion), Lau said that there are still approximately 30 US-listed Chinese firms eligible for a secondary listing. “Just look at the number itself, it is a very good pipeline.”