IPOs on Fire in Hong Kong, KPMG Says

Initial public offerings boomed in Hong Kong in the first quarter, accounting firm KPMG says, a trend expected to only accelerate as the city’s stock exchange prepares to tweak its rules to attract high-tech listings.

In a report released Monday, KPMG boosted its prediction of this year’s fundraising value through IPOs in Hong Kong to HK$250 billion ($31.9 billion), up from its estimate of HK$200 billion made late last year. Steps underway by the Hong Kong Exchanges and Clearing (HKEX), the operator of the Hong Kong bourse, to relax listing rules for tech firms will encourage more big-ticket IPOs this year, it noted.

In the first three months of this year, a total of 62 IPOs were completed — up 59% from the same period last year. The jump mainly reflected deals from the banking and real estate sectors. Funds raised by the IPOs totaled HK$24.4 billion — 82% higher than the same time last year, KPMG said.

The biggest IPO in Hong Kong so far this year was the HK$6.8 billion listing of the Bank of Gansu, followed by the HK$4.5 billion IPO of Zhenro Properties Co. and the HK$4.1 billion listing of property management firm A-Living Services Co.

As early as April, Hong Kong plans to amend its listing rules to accept companies with dual-class shares —a structure in which a company’s founders and top executives can maintain control through greater voting rights — as well as biotech companies not yet profitable. It’s a major step intended to attract more tech listings to compete with markets in New York and Frankfurt. KPMG said the rule changes will encourage high tech companies, especially those from the fintech and biotech sectors, to choose to debut on the Hong Kong bourse this year.

Several Chinese tech giants are looking to list in Hong Kong this year due to the change, including smartphone maker Xiaomi Inc. and local service provider Meituan-Dianping, Caixin has learned.

Following Hong Kong’s move, Chinese mainland regulators have also taken steps to welcome tech firms to float on its Shanghai and Shenzhen markets.

The mainland securities regulator has been studying measures to streamline IPO reviews for tech startups and is considering issuing China Depositary Receipts (CDRs) — modeled after American Depositary Receipts — to enable overseas-listed Chinese companies to launch secondary listings in home markets.

In early March, Foxconn Industrial Internet, a unit of the world's largest contract electronics manufacturer that assembles Apple's iPhones, received its IPO approval in just 36 days — a breathtaking pace in China that underscored the mainland regulators’ attempt to attract companies from emerging sectors to its stock market.

China’s largest electric-car battery-maker, Contemporary Amperex Technology Co. (CATL), has also gained a faster review than other applicants. A person close to CATL told Caixin that the company planned to debut in the middle of this year but the listing “will possibly come sooner.”

Unlike in Hong Kong, IPOs on the mainland’s exchanges slowed down in the first quarter, partly because regulators more closely scrutinized IPO applicants, KPMG said.

The approval rate of IPO reviews was 44% in the first quarter of this year, down from 56% the previous quarter and 90% the same time a year ago.

In the first three months, 38 companies completed IPOs in Shanghai and Shenzhen, raising a total of 40 billion yuan ($6.4 billion). The figures declined 79% and 43% year-on-year, respectively, according to KPMG.

Despite the tightening scrutiny, mainland regulators have granted more approvals to higher-value IPOs. The average deal size roughly doubled to 1.05 billion yuan in the first quarter, from 520 million yuan a year ago, due to more IPOs within the 1 billion yuan and 5 billion yuan range, KPMG said.

Companies from industrial sectors topped all others to account for 29% of the total number of IPOs in the Shanghai and Shenzhen markets, according to KPMG, which added that an additional 141 industrial firms are waiting in the queue for IPO reviews. The accounting firm said the industrial firms are expected to continue to be the major players in the mainland’s IPO market as regulators push forward manufacturing upgrades as a major national strategy.

Meanwhile, companies from the technology, media and telecom sectors, as well as consumer goods and services, will also be major contributors to the mainland’s IPO market this year, KPMG said.

Investment flows between Hong Kong and the mainland markets will continue growing through the stock connect programs. A significant rise of capital flows from Hong Kong to mainland markets can be expected after the inclusion of the A-share market into MSCI’s global benchmark in June, KPMG said.

Contact reporter Han Wei (weihan@caixin.com)