EY reports that Hong Kong's IPO market is showing signs of recovery.

• George Chan, global IPO leader at EY, stated that the market for initial public offerings in Hong Kong is expected to experience significant growth over the next five years.
• If the interest rate is reduced by 1 percent, it would have a significant impact on the IPO market, according to Chan.
• In an email on Wednesday, Marcia Ellis, global co-chair of private equity practice at Morrison Foerster in Hong Kong, stated that their HK cap markets team is extremely busy and has a robust pipeline for H2. She added that they anticipate a significant number of HKSE listings.

George Chan, global IPO leader at EY, predicts that the market for initial public offerings in Hong Kong will significantly improve in the next five years, beginning in the second half of this year.

"I believe it will take a few years to reach the peak again, but the trend is evident," Chan stated. "I can see the end of the tunnel in sight."

In the past three years, Greater China IPOs have been limited due to high U.S. interest rates, regulatory oversight, sluggish economic growth, and tensions between the U.S. and China.

While the number of IPOs and funds raised in the U.S. increased significantly in the first half of 2024 compared to the same period in the previous year, there was a sharp decline in listings on mainland China and Hong Kong.

Chan, based in Shanghai, stated that many macro trends are turning around, which could lead to more IPOs in Hong Kong.

"Hong Kong is experiencing a reversing trend as more U.S. dollar funds are moving back to the city, with the main reason being that Hong Kong has already factored in the uncertainties."

The stock market index has experienced a 5% increase year-to-date after four consecutive years of decline, marking the worst losing streak in its history, according to Wind Information.

In an email on Wednesday, Marcia Ellis, global co-chair of private equity practice at Morrison Foerster in Hong Kong, stated that their HK cap markets team is extremely busy and has a robust pipeline for H2. She added that they anticipate a significant number of HKSE listings.

Previously, many companies were waiting for approval from China Securities Regulatory Commission to list in mainland China's A share market. However, with recent approval from CSRC, these companies have decided to switch to listing in Hong Kong.

In June, China introduced new measures to boost venture capital, with authorities publicly stating their support for IPOs, particularly in Hong Kong. As a result, investors and analysts are closely monitoring the pace of IPO approvals as an indicator of a significant shift.

Another factor supporting Hong Kong IPOs is the satisfactory economic growth in mainland China, where many listed companies are based.

He expects consumer companies could be among the near-term IPO beneficiaries.

He pointed out that as the economy recovers slowly in China, many people are willing to spend, particularly in less developed regions.

In May 2021, retail sales in China grew by only 3.7% compared to the same month in the previous year, which is significantly lower than the growth rates of nearly 10% seen in previous years.

The U.S. Federal Reserve and other major central banks are reducing their aggressive interest rate hikes, making Treasury bonds a more appealing investment for many institutions instead of IPOs.

If the interest rate is reduced by 1%, it would have a significant impact on the IPO market, according to Chan.

In the first half of 2021, Hong Kong IPOs raised $1.5 billion, a 34% decrease from the previous year, according to EY's report.

In the first six months of 2024, mainland China IPOs raised $4.6 billion, which is a 85% decrease from the previous year, as per EY.

During a conference last week, Bonnie Chan, CEO of Hong Kong Exchanges and Clearing Limited, stated that the exchange has received 73 new listing applications this year, which is a 50% increase compared to the second half of last year. It's important to note that she is not related to EY's George Chan.

She remarked that the pipeline is progressing well, with a total of 110 IPOs scheduled for a Hong Kong listing. "What we require now are favorable market conditions for these IPOs to launch and price effectively," she stated.

Improving post-IPO performance

"EY's Chan stated that a strong pipeline is required, which includes an interested investor with the necessary funds to invest and a positive aftermarket performance."

The average first-day return of new listings on the Hong Kong stock exchange in the first half of 2024 was 24%, significantly higher than the average of 1% in the same period last year, according to EY.

""Hong Kong IPOs have been performing well in the aftermarket, with an upward trend projected for the next five years, according to Chan," he said."

In the second half of 2024, Chan anticipates an increase in the number of deals.

He stated that the likely size of those medium-sized investments would be between 2 billion Hong Kong dollars to 5 billion Hong Kong dollars ($260 million to $640 million), but he predicted better market momentum in 2025.

Early-stage investment into Chinese startups has been negatively impacted by slowing economic growth and geopolitical uncertainty.

In 2023, foreign investors invested $19 billion in Greater China, a decrease of 69% from the $67 billion invested in 2021, according to Preqin.

While investors from Greater China have continued to participate in major deals, U.S. investors have been absent from the largest transactions in recent years, according to a report from the firm released last month.

U.S. IPO outlook

EY's Chan predicts that the current scrutiny of China-based companies' IPOs in the U.S. will be temporary, but data security rules will still present a challenge.

Beijing's cybersecurity review is mandatory for a China-based company with over 1 million users to list overseas in early 2023.

As people become more familiar with the Chinese securities regulator approval process and more comfortable with geopolitical tensions, more large companies would consider the U.S. market as their final destination, according to Chan.

"As institutional investors aim to generate profits, they may be interested in investing in large Chinese companies when the opportunity arises."

He refused to discuss particular IPOs and stated that certain notable listing plans are "unique occurrences."

Didi, a Chinese ride-hailing company that delisted from New York in 2021, has denied reports that it plans to list in Hong Kong next year. Meanwhile, Shein, a fast-fashion company that does most of its manufacturing in China, is trying to list in London following criticism in the U.S., according to a CNBC report.