Hong Kong's IPO drought shown in worst quarter of pandemic era

[HONG KONG] Initial public offerings (IPO) in Hong Kong slumped to the lowest level since the start of the pandemic, with external factors ranging from inflation to the war in Europe adding to China-related woes.

Twelve companies raised about US$1.86 billion in IPO proceeds since January, according to data compiled by Bloomberg. That's slightly more than the 3 initial months of 2020, when the spread of coronavirus hit deal making, and close to the tally for the first quarter of 2013.

The 90 per cent plunge from last year shows an extended slow activity that has been prevailing in the second half of 2021, as China tightened rules for its companies seeking a listing abroad amid a wide-ranging clampdown. On top of that, IPOs plummeted worldwide as volatility was stoked by the war in Ukraine and soaring inflation sparked risk aversion among investors.

For a recovery in activity to happen in the Asian financial hub, clarification is needed of the regulatory landscape for Chinese companies seeking a listing, including those linked to data and cybersecurity, according to Sharnie Wong, an analyst at Bloomberg Intelligence. "The second quarter may be too soon for a sharp pick up," she said.

Strong participation of anchor investors was essential to support the offerings that managed to come to market, but those investors have been saddled with losses alongside the broader market. Shares sold in JL Mag Rare-Earth's US$544 million IPO, the largest this year, lost more than a fourth of their value since the first session. Five cornerstone investors snapped about half of the deal.

As risk-off sentiment pressured valuations, more Chinese companies trading in the US may decide to list in Hong Kong by way of introduction. The mechanism used by electric vehicle maker Nio that is also being considered by Tencent Music Entertainment Group doesn't involve selling new shares or raising funds, and is a cheaper process for those seeking a so-called homecoming listing.

"We are definitely going to see more planned and reported listings by way of introduction - a reflection of the market condition and low share prices," said Kenneth Chow, the co-head for ECM, Asia-Pacific at Citigroup.

A pipeline for big deals started to gain traction as volatility with equities trading subsided. PAG, an Asia-focused private equity firm, Hozon New Energy Automobile, a startup that makes affordable electric vehicles, and Belle Fashion Group, China's biggest women's footwear retailer, are all working on IPOs that could each raise US$1 billion or more. BLOOMBERG