The biggest initial public offering (IPO) in Hong Kong this year had a disappointing performance, indicating that the market requires time to recover, despite optimistic indications. The offering gained $675.2 million, but shares of KKR & Co.-backed Chinese liquor company ZJLD Group fell by almost 18% on their first day of trading on April 27.
Hong Kong's stock market faced a challenging year in 2022, experiencing a decline of 15%, marking the third consecutive year. The poor performance can be due to various factors, including elevated inflation and increasing interest rates worldwide. Additionally, Beijing's zero-Covid strategy and a downturn in the local property market further weighed down the stocks. Chinese companies often opt for secondary listings in Hong Kong as an additional avenue to access investors and capital.
The trading debuts of Hong Kong's two largest IPOs in 2022 had failed with Chinese automobile manufacturer Zhejiang Leapmotor experiencing a significant decline of 34%, while property management service provider Onewo witnessed a slide of nearly 7%.
The Hong Kong IPO market had a sluggish start in 2023. During the first quarter, the city hosted 18 IPOs, raising a total of 6.6 billion Hong Kong dollars ($840 million). In comparison, the same period a year ago saw 15 IPOs raising HK$13.6 billion. According to data from Deloitte, although there was a 20% increase in deal volume, the deal value went down by 51%.
“Valuations at this moment have not picked up as compared to two to three years ago. We still need some time,” said Robert Lui, Hong Kong offering leader of Deloitte China’s Capital Market Services Group.
“This slow performance is in line with our forecast. It will take time for business and economic activities, especially between the Chinese Mainland and Hong Kong, to fully revive after the reopening of the boundaries, and eventually market valuations and IPO activity will follow suit,” said Lui in a Deloitte China Q1 2023 report.
Despite the challenges, analysts from Deloitte China, EY, and KPMG maintain an optimistic outlook and expect a revival of the market in 2023. They believe that the full reopening of Chinese and Hong Kong borders, along with more relaxed listing regulations, will contribute to the market's recovery.
The Chinese technology giant, Alibaba, has divided itself into six distinct units, indicating a potential loosening of government control over tech giants. With the exception of Taobao Tmall Business Group, each unit is now able to pursue separate listings. There are reports suggesting that Cainiao, Alibaba's logistics arm, and Freshippo, its grocery business, may be among the first units to undergo initial public offerings (IPOs). However, there is no official confirmation of the same.
According to Lui from Deloitte, the present market conditions are significantly improved in comparison to the fourth quarter of 2022, as evidenced by the potential deals that are being considered for launch on the Hong Kong stock exchange.
“We expect second half of 2023 to be an exciting time for the Hong Kong IPO market with expectations of the end of U.S. interest rate hikes leading to a repositioning of funds’ investment strategies to Asia’s high-growth regions like China,” Edward Au, Southern Region managing partner at Deloitte China, said in the firm’s first quarter China report.
