Asia Capital Markets Research

Hong Kong's future as a financial center is increasingly centered on mainland China. That's a boon for the city's capital markets, among the world's best performing in a difficult year. From January to July, Hong Kong IPOs raised US$87.5 billion, up 22% year-on-year, buoyed by a flurry of Chinese tech and biotech listings. While that tally is impressive, the best is yet to come. Ant Group's dual-listing IPO in Hong Kong and Shanghai is expected to raise US$35 billion, half in each city. The IPO is likely to occur before the U.S. presidential election on November 3 to eschew possible market volatility.

The Hong Kong IPO market's hot streak shows no sign of slowing down, despite political turmoil and the pandemic-induced downturn. The reason is simple: Whatever changes come in Hong Kong, Chinese firms are prepared for them. After all, the firms listing on the HKEX are all based on the mainland. At the same time, China's economy is gradually recovering. Business activity is picking up.

Investors appear to have adjusted to a new normal in Hong Kong, one characterized by political unrest and economic uncertainty. As the coronavirus ebbs, protests are returning to Asia's preeminent financial hub. The former British colony remains mired in a steep recession. And yet, large Chinese tech firms are pushing ahead with initial public offerings and secondary share listings on the Hong Kong Stock Exchange. At the current rate, Hong Kong could be the world's hottest IPO market in 2020.

The past year has been one of the hardest in memory for Hong Kong, which has been in recession since the fourth quarter of 2019. While the city has contained the coronavirus relatively well, it still faces political turmoil with no end in sight. You wouldn't know that from the state of its IPO market though, which had the most new listings among all stock exchanges in the first quarter and is gathering momentum faster in the second quarter than any other major index.

The Hong Kong IPO market has picked up considerably since early May. Suzhou-based biotech firm Peijia Medical listed on the HKEX on May 15, raising HK$2.3 billion (US$302 million) that it will use to develop its product pipeline of heart valve and vascular repair devices. Peijia Medical's shares jumped 74% in its first day of trading, the best debut performance this year so far for an IPO over US$50 million.

Hong Kong's future as a financial center is increasingly clear: It will be a global fundraising hub for Chinese firms, especially in the technology sector. These days, the biggest Hong Kong IPOs are almost all Chinese tech firms, whether the listings are primary or secondary. Non-Chinese tech firms are more likely to go public in New York or London. Following Alibaba's mammoth secondary share listing on the Hong Kong Stock Exchange in November 2019 - which raised US$13 billion - its arch-rival JD.com is reportedly planning a $US3 billion share sale in Hong Kong this year. Alibaba's primary listing is on the NYSE while JD.com is listed on the Nasdaq.

Hong Kong's IPO market was expected to be one of the world's best performing this year, attracting Chinese firms eager to raise capital internationally. Whereas such firms may have preferred listing on the NYSE or Nasdaq in years past, tensions in the U.S.-China relationship have caused many of them to reconsider.

Then the novel coronavirus broke out, sapping the steady momentum that had been building in Hong Kong's capital markets since Alibaba's mammoth secondary share listing in November 2019. Artificial intelligence startup SenseTime is the latest major Chinese tech firm to put off a planned Hong Kong IPO this year. SenseTime will instead seek up to US$1 billion in private funding.

Hong Kong's IPO hot streak is expected to continue this year with the former British colony among the world's top three markets for initial public offerings, according to PricewaterhouseCoopers (PWC). PwC expects up to 180 companies to raise as much as HK$260 billion (US$33.4 billion) on the Hong Kong Stock Exchange.

While sufficient to place Hong Kong among the world's three top IPO markets, that amount would still mark a decline of almost 18% from 2019's HK$315.5 billion, which was No. 1 globally. Alibaba's mammoth secondary share listing of HK$100 billion (US$12.9 billion) accounted for almost 40% of the total last year.

Alibaba's secondary share listing in Hong Kong is back on track and now set for late November. The Chinese e-commerce giant eschewed Hong Kong for New York when it first went public in 2014, to the disapproval of some in Chinese officialdom. The Hangzhou-based company has been planning a secondary listing in Hong Kong to fund large-scale expansion plans. Those plans were put on hold amidst the worst political instability to hit Hong Kong since the late 1960s.

While the protests have yet to abate, Alibaba is ready to go ahead with its Hong Kong IPO anyway, with a probable date of November 26. The IPO is expected to raise up to $13.4 billion, analysts say. A draft prospectus reviewed by Reuters shows that Alibaba plans to use the money to invest in e-travel group Fliggy, Ele.me, an online delivery and local services platform, and YouKu, a Chinese variation of YouTube.

Hong Kong has had a tough year. Following more than four months of protests, the city's economy slipped into recession for the first time in a decade in the third quarter, contracting 3.2% in the July-September period compared to the quarter ended June 2019. The political instability shows no signs of easing either.

Yet, Hong Kong has led the world in initial public offerings since early September. Data compiled by Bloomberg show first-time share sales on the Hong Kong Stock Exchange are US$7.9 billion since September 1, ahead of the Nasdaq's US$7 billion and the New York Stock Exchange's US$3 billion. Anheuser-Buschs's US$5.8 billion IPO of its Asian unit accounted for the lion's share of new Hong Kong listings.

Alibaba's expected Hong Kong listing was supposed to be a grand homecoming. After all, the company's $21.8 billion 2014 NYSE listing - at the time the largest global IPO ever - disappointed some folks in Chinese officialdom who hoped China's biggest e-commerce firm would go public closer to home. Since the HKSE revised its rules last year to allow dual listings, there has been much speculation about Alibaba listing in Hong Kong.

In August, international media reported that Alibaba would suspend plans to list its shares in Hong Kong. The stock offering, which was expected to raise US$10-15 million had been scheduled for late August, according to a recent New York Times report. The deal could well have been the largest of the year and the top follow-on share sale in seven years. Alibaba nixed plans to list its shares in Hong Kong because of ongoing protests in the city and associated instability, the report said.

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