What could have prompted the rapid depletion of nearly HK$1 trillion ($130 billion) in liquidity at Hong Kong’s banks in February. Capital flight? Collapsing confidence in the local economy? According to the Hong Kong Monetary Authority, there was an almost 12% decline in bank deposits versus those held in January. The reason: local investors redirecting their savings into jumbo initial public offerings on the city’s stock market. With most of the deals vastly oversubscribed this cumulatively ‘froze’ huge sums during the IPO allocation process as punters put in gargantuan orders, in the knowledge they would likely only get a fraction of the stock bid for.
Indeed, the IPO market in Hong Kong sizzled in the first quarter, ranking just behind Nasdaq as a destination for public offerings. There were fewer deals compared to the same period last year at 32, but the funds raised were eight times higher, hitting a record HK$133 billion. Each new listing on the Hong Kong Stock Exchange’s main board was 2.6 times bigger than in the prior period, averaging HK$1.4 billion in size.
Mainland Chinese companies have dominated the scene, accounting for 78% of the total capital raised, with the majority of IPO candidates coming from the internet, technology and healthcare sectors. Topping the ranking was short- video platform Kuaishou. Its HK$48.3 billion share sale (see WiC527) was the world’s largest internet IPO since Uber’s New York offering in May 2019.
Artificial intelligence and search engine giant Baidu (see WiC531) and video streaming services provider Bilibili (see WiC492) came second and third in the tables, joining a litany of US traded-stocks that followed in the footsteps of Alibaba (see WiC476) in opting for a secondary listing in Hong Kong.
Fuelled by deteriorating Sino-US relations, the wave of these so-called “homecoming floats” would not have been possible without a revamp of the rules at the Hong Kong bourse in 2018 (see WiC392). Controversial at the time, it has opened the door to companies with weighted-voting rights, as well as pre-profit biotechs and new equity offerings from Chinese firms disenchanted by their experience in other markets that they deem to have undervalued their businesses.
An influx of these players is changing the face of Hong Kong’s IPO industry. Gone are the days when financial services firms were the most sought-after issuers. Now new economy stocks take centre stage. Major transactions are triggering enthusiastic responses from investors: about 41% of the newly-arrived issuers priced their offerings at the top end of the range during the first quarter. The blockbuster IPOs are having a broader impact: the average valuation of Hong Kong’s main board – at a price-to-earnings ratio of 19 – was higher over the period than that of its Shanghai counterpart for the first time.
While an increasing number of IPOs are being cancelled on mainland Chinese bourses because of tighter due diligence requirements (see WiC531), Hong Kong is seeing a steady stream of new supply. Deloitte, an accounting firm, expects Hong Kong’s offshore financial centre to play host to at least 120 IPOs this year. Up to five of them will boast deal sizes of more than HK$10 billion, which could take total funds raised to more than HK$450 billion – the record set in 2010. PricewaterhouseCoopers believes that Hong Kong has a good chance of regaining its global crown as 2021’s top IPO venue.
Most notably, Bytedance, which operates popular short video app TikTok (known as Douyin at home) and news aggregator Toutiao, has appointed securities underwriters for its mega IPO in the city, China Securities Journal reported on Wednesday. The worth of the nine year-old company is approaching $400 billion in the private market, almost tripling the valuation after its series C fundraising last March, according to the South China Morning Post. The Beijing-based tech firm is offering its employees the option to trade their bonuses for Bytedance’s untraded stock at $126 per share, up from below $50 a year ago, according to 36Kr, a local media outlet.
Also in the pipeline are market debuts for JD.com’s logistics arm; Anjuke (an online property brokerage affiliated with classifieds giant 58.com); Wumei Technology Corp (which operates a pair of China’s supermarket chains Metro China and Wumart Stores); Nayuki Holdings (which runs the main rival to tea-based beverage chain HeyTea); and WeDoctor (a Tencent-backed medical service platform).
The Hong Kong market isn’t always a home run for new issuers, though. Chinese fintech company Bairong Inc, which raised $507 million, tumbled 16% on its initial trading day. Video-streamer Bilibili was another disappointment in early trading, with minor share price declines when it debuted at the end of March. Baidu’s shares closed unchanged on its first day of trading (though they have dropped 18% since then). However, the tech giant – which is increasingly focused on autonomous driving – priced its secondary listing at 15% below the top end of its original price target too.
The lacklustre performance of some of these IPOs was partly due to a pullback in tech stocks in the aftermath of the debacle at hedge fund Archegos. Rising yields on US Treasuries have not helped much either. Shanghai-based Trip.com, for instance, failed to price its secondary listing in Hong Kong at the top end of the range this week. Selling 31.6 million shares at HK$268 apiece, the travel platform raised HK$8.5 billion, or 19% less than the original target of HK$10.5 billion. The decline in its American depositary receipts (ADRs) for four straight days to Monday had made that top-end price target a tougher sell, suggested the South China Morning Post, noting that Trip’s com’s offering price represented a 2% discount to its New York closing price the prior night.
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