Hong Kong’s initial public offering (IPO) market is set to revive amid growing signs of recovery, including investor confidence embedded in the convertible bond market and a large pool of listing candidates in the pipeline, according to global top arranger Citigroup.
Those signs include a rebound in the US IPO market, stability in China’s macroeconomic data, optimism in the equity-linked bond market and a narrowing of valuation expectations between buyers and sellers, said James Fleming, London-based global co-head of equity capital markets.
“We are in the early stages of the cyclical recovery,” he said in an interview in Hong Kong on Monday. “We are heading in the right direction. The backlog is very big.”
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Citigroup ranked first in the league table for global IPO and Asia-Pacific equity offerings’ in the first eight months of this year, according to Bloomberg data, topping rivals including JPMorgan, Goldman Sachs and Morgan Stanley. Its recent deals in Asia included Prudential’s US$2.4 billion equity offering and sponsorship of the IPOs of China Resources Mixc, Onewo and Leap Motors.
‘I’m very confident in the Hong Kong and China issuance outlook, but I’m patient as well,’ says James Fleming, global co-head of equity capital markets at Citigroup. Photo: Edmond So alt=’I’m very confident in the Hong Kong and China issuance outlook, but I’m patient as well,’ says James Fleming, global co-head of equity capital markets at Citigroup. Photo: Edmond So>
Hong Kong’s IPO market has been in the doldrums since Chinese authorities infamously scuttled Ant Group’s jumbo IPO in November 2020, followed by a crackdown on the tech sector amid data security and geopolitical risks. Once the world’s top IPO venue, Hong Kong slipped to 13th in the first half this year as deals shrank in size and frequency.
Companies raised US$16.5 billion from new stock offerings in the US in the first half of this year, a 76 per cent jump from a year earlier, according to the London Stock Exchange Group data, while Hong Kong’s volume fell to a two-decade low. Half of the US IPOs were priced at the mid-to-higher end of the marketed range, while the average first-day premium was about 15 per cent, Fleming said.
“When investors are making money and getting alpha [or excess returns], the life cycle will start,” he said on his business trip to Hong Kong.
“One of the reasons I’m here as global head of ECM is because I’m very confident in the Hong Kong and China issuance outlook, but I’m patient as well.”
Besides, a recent jump in convertible bond sales by Chinese companies suggest investors are willing to accept lower yields for the option to participate in the stock upside potential. That represents a “good leading indicator” for the IPO market revival, Fleming added.
“Convertible bonds always come first in the recovery cycle, given the downside protection they provide,” he said. “But the reality is investors are buying China equity upside, so this is a confidence signal.”
Chinese companies, including JD.com, Alibaba Group Holding, Trip.com and Lenovo Group raised more than US$10 billion from the sale of such bonds, which typically pay lower annual coupons than straight bonds and grant holders the right to convert them into stocks at a preset price in future.
“Convertible bonds, or equity-linked notes, will continue to be a strong theme,” Fleming said, pointing to a large amount of high yield and investment grade bonds that will need to be repaid or refinanced next year. “Even if we have interest-rate cuts, there still will be a cost of funding arbitrage for convertible bond issues,” he added.
Meanwhile, Citigroup is working on a “healthy number” of proposals by Chinese companies to list their shares on US stock exchanges. They could go to the market for fresh capital when issuers and investors reach “equilibrium” on stock valuations, according to Kenneth Chow, co-head of equity capital markets for Asia.
Stock indices and prices seen outside the Exchange Square in Central in February 2024. Photo: Sun Yeung alt=Stock indices and prices seen outside the Exchange Square in Central in February 2024. Photo: Sun Yeung>
More than 70 companies have obtained approvals for a US offering from the China Securities Regulatory Commission, according to official data.
“There are still a lot of Chinese companies that wish to list in the US, the deepest and most liquid market in the world,” Chow said. “We don’t need investors to turn bullish on China to see a revival of IPOs. “We just need investors to be rational on how they look at China, and we are more than halfway there.”
While valuation remains a sticky point, the issue should be resolved with time as China is too significant to be ignored, Fleming said.
“My confidence in China comes from its significant weighting in the MSCI Emerging Markets Index and GDP growth target of 5 per cent, which is very strong in the global context,” he said. “You also have huge savings being built up by consumers that will drive economic growth, and investors’ willingness to invest in China.”
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
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