KPMG forecasts a strong outlook despite competition and global market uncertainties
KPMG forecasts Hong Kong’s IPO market will continue a strong run for the rest of 2015, driven by an active pipeline. Ongoing reform of capital markets in Mainland China will additionally bring opportunities and challenges to Hong Kong.
Excluding listings by introduction and transfers from the Growth Enterprise Market (GEM) to the Main Board, the number of IPOs rose 2.3 percent year on year to 45 in the first half of 2015, while a few sizeable deals boosted IPO proceeds by 57.6 percent to HKD129.4 billion, which helped Hong Kong to become the world‘s largest IPO market (in terms of IPO proceeds) ahead of Shanghai.
Rebecca Chan, Partner and Head of Hong Kong Capital Markets Group, KPMG China, says: “A number of Chinese financial services providers are planning to launch IPOs in Hong Kong in the coming months, including securities brokerages, insurers and asset management firms; deals in pharmaceutical and environment-related sectors will also be popular. The outlook for the rest of 2015 is therefore promising.”
As of 30 June 2015, there were 62 active listing applications submitted to the HKEx. The upcoming Shenzhen-Hong Kong Stock Connect will also help increase the competitiveness of Hong Kong’s capital market.
Chan says: “The Shenzhen stock market comprises mainly of small and medium sized companies including those in their early growth stages. It supplements the offerings made available by the Shanghai-Hong Kong Stock Connect and the additional choices are expected to attract interest from overseas investors.”
On the other hand, as Mainland China continues with market reforms and proposals for the introduction of new funding channels, this poses greater competition for Hong Kong.
China’s securities regulator is moving ahead with reforms to its stock issuance regime, from the current approval-based system to a registration-based system. The proposals may significantly shorten the time for processing an IPO and provide an additional venue for Mainland companies to seek funding locally.
Meanwhile, the National Equities Exchange and Quotations (NEEQ), commonly known as the new third board, provides an alternative source of funding to small and medium-sized companies such as start-ups. Companies can apply directly to the NEEQ with no regulatory approval required. The less stringent qualification requirements and lower costs to get traded on the NEEQ will attract interest from small-cap companies.
The Shanghai Stock Exchange has also proposed to launch a board for companies in emerging industries (the “Emerging Board”), targeting businesses that have grown to a certain size and with a clear strategy, such as overseas listed red chips or internet companies. The Emerging Board together with the registration-based system may significantly shorten the listing process and streamline listing requirements.
Louis Lau, Partner, Capital Markets Group, KPMG China, says: “Hong Kong needs to find ways to maintain its competiveness. For example, HKEx can consider repositioning the GEM Board to attract listings from smaller-sized companies or those at start-up stage that lack a profitable track record. It may also explore ways to attract secondary listings for companies who have obtained their primary listings in overseas exchanges.”
In addition, potential changes on variable interest entities (VIE) structures in China may led to more Mainland technology companies currently listed or seeking to list in the US or Hong Kong to consider a return to the domestic A-share market.
Lau says: “Unwinding VIE structures however involves complex legal and taxation matters, which is not expected to happen shortly. If this happens, Hong Kong will have to compete more severely with the A-share market in terms of attracting Mainland technology companies to list here.”
Meanwhile, the HKEx has been studying to allow different shareholder structures other than the “one share one vote” structure in Hong Kong. KPMG is of the view that should the proposals for secondary listings be adopted, Hong Kong may attract a number of large US listed Chinese technology companies to seek a secondary listing in Hong Kong.
Chan concludes: “The lingering Greek debt crisis and potential increase in interest rates will add uncertainities, however with a strong pipeline and a number of sizeable deals expected to list in the second half of the year, we maintain our forecast for 2015 for an estimated 110 IPOs, raising over HKD200 billion in Hong Kong. The anticipated launch of the Shenzhen-Hong Kong Stock Connect in the second half of 2015 is also expected to boost Hong Kong’s stock market and have a positive impact on IPO activities.”
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KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have more than 162,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG China has 16 offices in Beijing, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Hangzhou, Nanjing, Qingdao, Shanghai, Shenyang, Shenzhen, Tianjin, Xiamen, Hong Kong SAR and Macau SAR, with around 9,000 people.
KPMG China refers to the member firms of KPMG International in Mainland China, Hong Kong SAR and Macau SAR.