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EY tells Hong Kong ‘to be innovative’ to keep city's IPO allure
Hong Kong retains its attractiveness as a major destination for initial public offerings, but the recent strong performance of China’s A-share market and easing listing rules there could weigh on the city’s bid to corner a larger share of the IPO market in the future, say analysts.
Christina Wang 26 Jun 2015

Hong Kong retains its attractiveness as a major destination for initial public offerings, but the recent strong performance of China's A-share market and easing listing rules there could weigh on the city's bid to corner a larger share of the IPO market in the future, according to accounting and advisory firm EY.

 

In the first half, Shanghai overtook Hong Kong as the No. 1 market for IPO in terms of value following a flurry of listings valued at US$16.7 billion. Hong Kong attracted US$16.1 billion in IPO deals, with New York coming in third with US$12.8 billion. Shezhen ranked fifth with US$7 billion.

 

Ringo Choi, managing partner, China South, Asia-Pacific IPO leader at EY believes that the A-share market, which now offers even better valuation, could pose a threat to Hong Kong's long-term attractiveness.

 

China is also coming up with a more efficient registration-based IPO system, which could convince companies to list in the mainland instead of in Hong Kong.

 

From January to June 23 this year, the average rate of return of new shares reached 467% led by ChiNext, according to EY.

 

"Hong Kong exchange should be on alert and be innovative in tackling difficult issues such as related-party transactions to keep Hong Kong an attractive venue for IPOs -- with a balance in risk management," Choi says, "This is the only way for Hong Kong not to be marginalized by the competition from the A-share market."

 

Key attraction of Hong Kong as a listing destination for Chinese companies is its capability to support follow-on offerings and its simplified listing procedures.

 

"Efficient system for follow-on offerings gives Hong Kong an advantage," says Choi. An offering can be done within two days and the cost is generally low at 1%, he adds.

 

Hong Kong is also well-known for its efficient listing procedure. In the A-share market, a company might have to wait a long time to get approvals given that several hundreds of companies planning to list there.

 

By contrast, in Hong Kong, the process can be shortened to several months, Choi says. In addition, Hong Kong exchange promises that it will give feedback to IPO applicants within one month after the company submits all documents required.

 

EY expects a total of HK$240 billion (US$31 billion) in capital can be raised from Hong Kong's IPO, raising its earlier estimate from HK$200 billion.

 

Hang Seng Index this year gained 15.5% to 27,145.75 as of June 25.

 

Hong Kong IPO returns remain solid. Average return on the first trading day on the Growth Enterprise Market in Hong Kong was 588%, while that on the main board was 12% in the first half, EY data shows.

 

Financials are leading in terms of IPO funds raised, and this is driven by large Chinese securities firms, Huatai Securities and GF Securities, which accounted for 54% of the total in first half.

 

As of June 25, there were 15 new companies that announced listing plans on the website of the Hong Kong Exchange. While Philip Securities estimates there are 32 Chinese companies in the pipeline to list in Hong Kong this year, including China Railway Materials with an IPO valued at 10 billion yuan (US$1.6 billion), Huarong Asset Management, HK$15.6 billion and China National Biotec Group, up to HK15.6 billion.

 

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