Last year has been a rather turbulent for listed Chinese companies as well as for those aiming to get listed on a stock exchange. In the beginning of 2018 overall sentiment was positive, but this slowly changed in the second half of the year. Stock exchanges across the globe even entered a bearish trend during the second half of the year, which was characterized by escalating trade war tensions, worries over slower economic growth and overvalued tech shares. The Dow Jones Index lost about 6% during 2018, the Shanghai Composite Index closed almost 25% lower than on January 1st, 2018. Let’s quickly recap the Year of the Dog and look forward to what 2019 might bring us, particularly looking at mainland companies listed in Hong Kong.
According to data from KPMG, Hong Kong took back the number one position of global IPO volumes. Main driver behind this achievement are mainland Chinese companies making use of the regulatory change in the financial hub, including allowing dual-class shareholding and bio-tech firms without revenues to list. Hence, technology firms that have shares with different voting rights will now be allowed to go public in Hong Kong, overturning rules that barred the likes of Alibaba Group from considering the former British colony. Some of the world’s largest and most influential technology companies, from Facebook to Google parent Alphabet, have share classes with different voting rights to protect their founders’ influence after going public.
In total Chinese companies that went public raised more than 70 percent of the total raised fund in Hong Kong. It should be noted, however, that despite a significant increase in the number of IPOs, the actual amounts that are raised are actually lower than in 2017. Part of the decline in terms of value in new IPO listings in Hong Kong is because of the dominance of small and medium-sized issuers in the territory’s local bourse. The lack of mega IPOs and strong domination of SMEs resulted in average sized deals.
Most notable IPOs in Hong Kong in 2018 from mainland Chinese companies include Xiaomi and Meituan Dianping. The former lowered its valuation in anticipation of its IPO from $100 billion to $55 to $70 billion, eventually raising $4,7 billion valuing the company at $54 billion. Xiaomi was set up in 2010 and doubled its smartphone shipments in 2017 to become the world’s fourth-largest maker. However, amid the Sino-US trade tensions and global declining smartphone sales, Xiaomi’s debut on the stock exchange started not well and continued even worse, coming to lose 14 billions of dollars well worth. Earlier this month, the smartphone giant promptly bought back 6 million shares to avoid further damage to its declining stock price.
Meituan Dianping, the Tencent-backed food delivery-to-ticketing service platform, received strong support from institutional investors despite a weak overall Hong Kong stock market and managed to raise $4.2 billion, putting the company at a $52 billion valuation. Yet, the initial momentum quickly evaporated and the share price plunged after the company reported increased operating cost and disappointed investors looked for a path to profitability.
Whereas most of the small and middle sized deals from mainland IPOs take place in Hong Kong, Xiaomi and Meituan can be seen as exceptions in terms of large IPOs from mainland companies in Hong Kong. The majority of the large and mainly tech related Chinese companies still prefer to obtain their listing in the US, even though they aren’t always doing so well there.
According analysts this is mainly due to the US being the largest most liquid capital market and investors are familiar with high growth and tech names. In addition, the approval process for IPOs in the United States goes relatively fast.
Another reason brought up by insiders is that the Hong Kong stock exchange is taking a more stringent view on everything from competing businesses backed by a common shareholder to longstanding structures such as variable interest entities, a widely used structure designed to get round Chinese rules that prohibit foreign ownership of certain internet assets.
On the other hand, New York is not always an easy option, with Chinese companies enjoying less brand recognition among US consumers. For example, the US has no investors who use Tencent Music, Meitu or other apps that are used by hundreds of millions Chinese citizens.
Therefore, the trend of listing in the US will most likely gradually change over time, as Asia might prove more attractive for fast-growing Chinese companies if regulatory barriers are worked out. That’s because of growing protectionism in the U.S., while investors in their home region may be more supportive. This trend might be further supported by cash rich Chinese (retail) investors and the fact that Chinese might be more confident in local companies than foreign investors, as they understand them better.
On a shorter timeframe, people are still confident of what 2019 will bring in terms of IPOs. PwC predicts 200 IPOs in 2019, including 60 on the GEM Board and one to two mega-sized IPOs on the Main Board, with an estimated total funds to be raised of between HK$200 to 220 billion. This level of activity will possibly see Hong Kong IPO market continue to thrive, however the total funds raised is predicted to be smaller than total funds raised in 2018.
In 2019, developments during and after the trade war truce, pace of U.S. interest rate hike, the U.K. political scene, the final Brexit arrangements and timetable, and the Chinese local debt issue are, however, key events to watch for the capital flow indicators, investor appetite for IPOs, and business performance of many Chinese-backed IPO candidates.
In the longer run, the listing platforms of the Mainland and Hong Kong will complement and supplement each other, offering investment opportunities in Chinese new economy companies in the tech, pharmaceutical and bio-tech industries to both Chinese investors as well as an international audience.