Hong Kong IPO market faces tough times

Written by Kapronasia || April 30 2024

Hong Kong has historically thrived as a financial center because of its ability to serve as a conduit for capital to and from mainland China. Under the one country, two systems governance model, Hong Kong’s financial system is more open than that of any mainland city, bestowing unique advantages on the territory. Meanwhile, with its capital markets flagging, Hong Kong has sought to use so-called “cornerstone investors” from the mainland – local government entities – to revive its IPO market. Results thus far have been underwhelming, suggesting the need for a more market-oriented approach.

According to The South China Morning Post, investors have lost on average 43% on the 231 IPOs in Hong Kong since 2021. Local government entity Nanshan SEI has lost about US$11.6 million on its stake in Robosense since the stock debut. Local government-owned asset managers in Shanghai and Tianjin have lost 60% of their IPO bets in Horizon Construction Development.

Fred Hu, founder and CEO of private equity group Primavera Capital, told SCMP that relying too heavily on cornerstone investors does not generate realistic pricing and distorts issuers’ growth profile. “For a healthy, functioning capital market like Hong Kong, we need private sector professional investors and institutional investors buying and deciding the credit liquidity,” he said.

Pre-pandemic, Hong Kong’s IPO market had many strong years thanks to the robust deal pipeline for technology companies, especially those in the consumer internet segment. Yet the slew of government crackdowns on companies in that segment has spooked investors as well as the companies themselves. If Hong Kong is determined to revivify its capital markets, it will have to make the case to Beijing that companies like Ant Group should be permitted to go public in a timely manner. In January 2023, Ant’s leadership said that it had no plans for an IPO. In December 2023, China’s central bank agreed that Ant Group’s mobile payment app Alipay has no controller, which is supposed to be a key step in the fintech giant’s restructuring necessary to put its IPO back on track.

If Ant got the green light to go public, we suspect other fintech deals that have been in limbo would also go forward, leading to a surge in confidence among private institutional investors. JD.com’s fintech unit JD Technology has twice jettisoned IPO plans since the Ant deal was nixed, first a planned listing on the Shanghai STAR Market and then one on the Hong Kong Stock Exchange. The company ultimately withdrew its respective applications because it could not secure regulatory approval from the China Securities Regulatory Commission (CSRC).

With regards to Ant, another challenge for the company is that its reputation among investors has been hit hard by mandated restructuring and the regulatory crackdown. In 2023, the Chinese fintech giant proposed to buy back up to 7.6% of its shares, giving investors a chance to reduce their exposure. Under the repurchase plan, Ant's valuation was reduced to roughly US$79 billion, a sharp decrease from an estimated US$280 billion in late 2020. 

During the quarter ended Sept. 2023, Bloomberg estimates that Ant's profit fell 92% to RMB 240 million (US$33.15 million), which the company attributed to a "net investment loss." While Ant in theory could resume the IPO process once it receives a financial holding company license, it likely needs to boost earnings significantly for several quarters in a row to ensure investor confidence in the deal.