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Treasury & Capital Markets
IPOs in Greater China remained strong in 2017, says EY
IPO activity in Greater China remained strong in 1H 2017, according to the EY Global IPO Market Study Report: Q2 2017.
The Asset 27 Jun 2017

IPO activity in Greater China remained strong in 1H 2017, according to the EY Global IPO Market Study Report: Q2 2017. China’s economic growth rate accelerated and the stock markets in the Mainland and Hong Kong have maintained a steady rise. The slowing GDP growth rate since April, along with the tightened liquidity resulting from financial deleveraging and the moderation of new share issuance, had a positive effect on the stability of the market. EY predicts that in 2H 2017, IPOs in A-share market will undergo appropriate adjustments, but the goal of ‘destocking’ will remain.

According to the EY report, 1H 2017 global IPO market has witnessed the strongest start over the past decade. The number of IPOs increased 70% year-on-year to 772 and the proceeds increased 90% to USD83.4 billion (RMB570 billion). Mainland China and Hong Kong stock exchanges will continue to lead the global markets with 315 IPOs, followed by Australia (45), NYSE (44), Nasdaq OMX (44) and Japan (38). In addition, globally, two of the top three IPOs were from Asia-Pacific and 10 IPOs have raised over US$500 million.

A-share: IPOs for destocking
The A-share market had a significant performance in 1H 2017, with 246 IPOs and total funds raised of 125.6 billion yuan, up 303% and 336% year-on-year respectively, according to EY estimates. The number of companies to go public which will be approved by the China Securities Regulatory Commission (CSRC) dropped to 585, down 20% from the end of last year.

“In Q2 2017, the capital market had been on a downward trend, IPOs experienced a slight slowdown. Proceeds of IPOs fell 20% compared to Q1 and the pace of IPO approvals also declined, which has helped stabilize the market to a certain extent. Overall, IPO approvals in 1H 2017 were stricter with the rejection rate rising to 14% from 7% of the previous year,” says Ringo Choi, EY Asia-Pacific IPO leader.

In terms of industry, both the number of IPOs and funds raised from industrial enterprises ranked first. Among the other active industries were TMT, materials, consumer products & retail and health care. Funds raised from IPOs in the financial industry shrunk as there was a lack of large banks being listed during the period.

It is worth mentioning that, measures such as the strict control of ‘back door’ listings and the destocking of IPOs have led to a significant decrease in the number of ‘back door’ IPOs in A-share market. In 1H 2017, the number of ‘back door’ IPOs in A-share market was only four, compared to 12 in the same period of last year.

Hong Kong: the biggest stock gains in the world
As predicted in the EY report, a total of 69 companies went public for the first time in Hong Kong in 1H 2017, raising HK$53.8 billion. IPO volume and proceeds increased by 82% and 24% respectively compared with last year.

Jacky Lai, EY assurance partner says: “Since the beginning of 2017, the Hang Seng Index has increased about 17%, outperforming other major indices of the world. The surging Hong Kong stock market was led by the recovering fundamentals of emerging economies, the low valuation of Hong Kong stocks as well as the increased capital inflows from the Mainland through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs.”

For the sector, the number of IPOs and funds raised in the construction and infrastructure industry have increased rapidly to 15 and ranked first together with retail and consumer products. This was linked to the implementation of the Belt and Road Initiative and the Hong Kong Stock Exchange’s (HKEX) strong promotion of Hong Kong as an investment and financing centre. The funds raised from IPOs in the financial industry ranked first, accounting for 58% of the total amount in 1H 2017. It is noteworthy that education enterprises saw a sharp IPO peak. In 1H 2017, there were five education enterprise listings in Hong Kong, two of which ranked among the top 10 IPOs in Hong Kong. The much-anticipated implementation of the Law of the People s Republic of China on Promotion of Privately-run Schools and the second-child policy will favour private educational institutions and promote capital market transactions in the education sector.

The 1H 2017 performance of IPO in Hong Kong’s Growth Enterprise Market (GEM) was very impressive. The number of IPOs in GEM accounted for 51%, exceeding that of the Main Board for the first time since 2003. The top three GEM IPO industries were consumer products & retail, telecommunications, media & technology (TMT) and construction & infrastructure. Eighty-six percent of companies listed on the GEM were from Hong Kong.

Regarding the public consultation of HKEX on the reform of Main Board and GEM as well as the establishment of the proposed New Board, Jacky Lai says: "The HKEX‘s public consultation for establishing the New Board is the first step to introduce the dual-class share structure. When innovative businesses consider a listing location, their main concerns may include their strategic objectives and valuations, investor acceptance and sentiment, costs, supervision and other preferences. For some enterprises, the dual-class share structure is an important consideration.”

“Creating a New Board, rather than allowing such companies to be listed on the existing Main Board or GEM, provides an alternative for companies that were previously barred from listing in Hong Kong. From another perspective, the proposed New Board can provide the HKEX with the opportunity to fix the loophole and bring some enterprises with a dual-class share structure to Hong Kong for second listing. This may increase the transaction funds and trading volume in the short term. If these companies are to be included in the Stock Connect programs, their shares can be traded by Mainland investors, which is a wise move.”

“Meanwhile, raising the threshold of GEM will significantly affect the local enterprises in Hong Kong. After all, more than 80% of the listed companies in the GEM are from Hong Kong. The scale of the local enterprises is relatively small due to the market size.”

Chinese enterprises’ appetite for US IPOs remained subdued
In 1H 2017, Chinese enterprises’ appetite for US IPOs remained subdued. Only four enterprises, mainly from education, fintech and health care industries, went to the US market for IPOs, raising US$274 million, equal to the same period last year in terms of the number and down by 39% in terms of capital raised respectively.

“The liquidity and attractive valuation of the US capital market and the US investors’ appetite for high-growth and promising enterprises have made the US an attractive place for Chinese private high-tech companies and enterprises in the new economies industries. The rectification of the domestic fintech industry since 2H 2015 made back door listing or IPOs very difficult in Mainland China. However, the positive attitude towards fintech in the US market has attracted more Chinese fintech enterprises to get listed in the US,” says Ringo Choi.


In 2H 2017: Stock market is expected to see stable and slight improvement
EY expects that the approval process of new shares will slow down in 2H 2017 at a stable rate. Industrials, TMT, and materials will be the top three industries in the IPO pipeline and more than ten city and rural commercial banks will queue for IPOs.

“In 2H 2017, the A-share market is expected to see a decrease in the scale of IPOs and an increase in small and medium-sized IPOs. The National Equities Exchange and Quotations (NEEQ) board, or new third board, is expected to add a ‘Selection Layer’ to improve the liquidity of high-quality enterprises through a differentiated system. The regulators will further strengthen market supervision and explore a smart supervision model to leverage big data. What’s more, the inclusion of China A-shares in the MSCI emerging markets index will attract more international capital flows,” Ringo Choi concludes.

“Hong Kong is expected to raise about HK$200 billion through IPOs in 2017, the same level as in 2016. The HKEX is committed to improving IPO requirements to attract more high-quality and high-growth enterprises to list in Hong Kong. It is also actively implementing the Shanghai-Hong Kong Stock Connect and improving the concepts of Bond Connect and IPO Connect to enhance the connectivity between Hong Kong and Mainland China and strengthen Hong Kong’s position as the world’s leading stock market.”

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