IPO increase expected in second half of 2019

New listings in the Chinese mainland and Hong Kong are expected to heat up in the second half of 2019 after pockets of weakness in the first three months, Deloitte China said in a report on Wednesday.

Uncertainty in Sino-US trade negotiations and Brexit affected worldwide initial public offering activities during the first quarter, the report said. Hong Kong's stock exchange ranked second globally in terms of IPO funds raised in the period, amid the reduction in new listings.

As of March 31, Hong Kong saw 37 new listings, raising a total of HK$20.4 billion ($2.6 billion). The number of IPOs was reduced by 42 percent from the previous 64, while funds raised dwindled from HK$24.4 billion — a 16 percent decrease compared to the same period last year.

"The statistics, in particular the absence of large, prominent deals and a drop in the listing applications, may suggest a weakening performance of Hong Kong's IPO market," said Edward Au, co-leader of the national public offering group at Deloitte China, in the report.

Although new listings on the mainland remained low due to strict regulatory requirements, stock exchanges in Shenzhen and Shanghai have surpassed other major bourses to occupy the third and fourth global positions, with 31 IPOs raising 25.6 billion yuan ($3.81 billion) versus 37 IPOs raising 40.7 billion yuan the same period of last year.

"The A-share market featured numerous IPOs from various city and agricultural commercial banks, as well as securities firms which attracted liquidity. We expect similar additional listings to ease the downward pressure on the economy," Anthony Wu, leader of China's A-Share Capital Market for the National Public Offering Group at Deloitte China, said in the report.

"A key Chinese government priority is to release more lending facilities from both larger and smaller banks to private enterprises, and small and micro businesses."

With the recent launch of an acceptance and review procedure of listing applications by the sci-tech innovation board, the report said new listings will flourish starting in the middle of the second quarter.

"How these new economy issuers will be valued, priced, subscribed before the offering and traded after the share flotation would have implications for future IPOs from new economy companies in both Hong Kong and the US," Au said.

"The A shares have been enjoying a better valuation for a long while, which may be elevated further in the early launch of the new board," he added. "However, as the new board's issuer base expands, investors turn mature and the A-share market becomes more internationalized over time. The gap between valuation for A shares and stocks in Hong Kong is expected to gradually draw nearer in the longer run. Ultimately, these new listing candidates are likely to base decision of listing destinations on their business development strategies and target investor bases."

Deloitte maintained its forecast for the IPO activities of Hong Kong this year — about 200 IPOs worth at least HK$180 billion. And the consulting firm expects about 110-150 new listings raising 140 -170 billion yuan to be completed on the main board, SME board and ChiNext in 2019. Another 90-110 IPOs may ultimately also be launched on the sci-tech innovation board.

More new paths of listing and listing models evolving from the existing dual-listing (A+H) and NEEQ+H models may gradually emerge helping to expand the two capital markets, reinforce the status of Hong Kong as an international financial center and further internationalize the A-share capital market, according to the report.