The performance of Hong Kong’s IPO market in the past year has left a sour taste in the mouth of many international investors, with numerous high profile stocks, including Cofco Meat Holdings and Hebei Yichen Industrial Group, tanking following their debut.
As a result, the first month of 2017 has been uncomfortably quiet for ECM bankers in the city. Most have blamed it on an early Chinese New Year and the unsettling news of Donald Trump moving into the White House last week, and are keeping their fingers crossed that business will pick up from mid-February.
That optimism however might be shattered. The Hong Kong IPO market has some structural issues that a strong aftermarket performances from a couple of companies is unlikely to fix. For things to pick up, more than anything else the city needs investors to undergo a change in sentiment.
And that is tricky to achieve and last week’s pricing of Wisdom Education International Holdings’ HK$850m ($109.6m) IPO, one of the few so far this year, is evidence of that. The deal ended up largely in the hands of Mainland investors after international accounts chipped in less than their initial indications of interest, wary of poor returns.
Unhappy investors are a big concern, but there is also more at stake in the primary market. This is because the city looks set to be drained of its main source of new listings — Chinese IPOs — due to the Mainland’s tough controls on capital outflows.
Hong Kong’s biggest problem is that it is caught in a vicious circle. In recent years, the large majority of its IPOs were from Chinese companies, where typically more than 50% of the shares are bought by Chinese investors. In most cases, Chinese issuers won’t come to the market without strong backing from Mainland accounts. And for foreign accounts too, Chinese money has slowly become a requisite for their involvement, as GlobalCapital Asia wrote in its cover story last week.
A reduction in the amount of money Chinese investors can move offshore will in turn reduce the number of Mainland companies listing in Hong Kong. And for the deals that do happen, the smaller Chinese participation will directly impact international buyers — which are already lacking confidence in the city’s stocks.
All this goes to show that Hong Kong can no longer rely on Chinese investors and issuers to keep its IPO market humming. Last year may have been strong for primary ECM activity but a perfect storm is now brewing over Hong Kong.