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Hong Kong and Mainland IPO Markets cooled down in first 10 months of 2012 amid Global economic slowdown

More new listings expected in fourth quarter as favourable economic policies launch


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Publish date: 31 October 2012

Impacted by poor market sentiment and global economy slowdown, the initial public offering (IPO) markets of Hong Kong and the Chinese Mainland (referred hereinafter as the 'A-share market') saw disappointing deal flow and volume in the first 10 months of 2012, according to professional services organization Deloitte Touche Tohmatsu. Looking ahead, while the A-share market is likely to remain challenged by various regulatory and market factors, the Hong Kong IPO market is expected to rally in the fourth quarter given the positive economic signs in China and the U.S.

Hong Kong market lost its shine but the market sentiment is picking up
In the first 10 months of this year, Hong Kong recorded the worst IPO performance since 2004 in terms of proceeds raised, with only HK$48.9 billion raised in 51 new listings, down 78% and 19% respectively from HK$221.4 billion and 64 listings in the same period of last year. No new IPO was launched on the Main Board (MB) in both May and September. The lacklustre market was also reflected by a record high in lapsed, rejected and withdrawn listing applications since 2004 and substantially fewer new listing applications.

"In terms of proceeds raised globally, Hong Kong has lost its premium position as the city has plunged from the first place to the sixth, trailing NASDAQ, New York Stock Exchange, Tokyo Stock Exchange, Shenzhen Stock Exchange and Bursa Malaysia, though still ahead of Shanghai Stock Exchange. While listings of Mainland companies have provided some support for Hong Kong, the general deal flow and volume from international listings have shrunk significantly. The dwindling market appetite has dried all dimensions of new listings from average deal size, top five IPOs to market valuation," said Mr. Edward Au, National Co-Leader of Public Offering Group of Deloitte China.

"But it is encouraging to see the return of new, larger listings in October with the pickup of market sentiment since September, following the U.S. Federal Reserve's (Fed) stimulus pledge and the Outright Monetary Program by the European Central Bank. The market is also boosted by the additional liquidity from the third round of quantitative easing by the Fed," added Mr. Au.

A-share market plummeted with inconsistencies
During the first 10 months of 2012, IPO activities of the A-share market lost steam as well, mainly attributable to the poor performance of the indices and the slowdown of listing application review. Only 153 companies were newly listed during the period, down 37% from 243 of last year. The proceeds raised also saw a steep fall of 59% from RMB249.5 billion last year to RMB103.4 billion in 2012, resulting in the weakest third quarter performance of the A-share market since 2009.

When commenting on the impact of regulatory control over the A-share market, Mr. Anthony Wu, China A-Share Capital Market Leader of National Public Offering Group of Deloitte China said, "The A-share market is showing a contradictory phenomenon. The 'three high' issue persists despite policies that encourage the lowering of P/E ratio. Majority of new listings (73%) still displayed double-digit P/E multiples (20-40 times), with even higher average first-day return.

All the new listings were over-subscribed as well. But on the other hand, the average deal size and proceeds from top five IPOs have reduced remarkably due to poor market appetite."

Overall deal flow and volume for both markets are poised to fall when compared with 2011
Looking ahead, Mainland enterprises' 'go global' strategy, Renminbi internationalization, streamlining of secondary listing process and the acquisition of London Metal Exchange would continue to bode well for the Hong Kong IPO market. The market will benefit from the Basel III, which will be effective on 1 January 2013, and the implementation of the 12th Five-Year Plan. Companies from the financial services, property, and retail & consumer sectors will have more fundraising needs.

"After leading the global IPO market for the past three consecutive years, Hong Kong will not be able to maintain its crown jewels on the global listing venue this year. About 65 companies will be listed in Hong Kong by the end of 2012, raising approximately HK$70-90 billion. But when compared with 2011, the deal flow and deal volume will drop by 28% and 67-74% respectively," told Mr. Au.

On the A-share market front, the outlook would be driven by State policies, the 12th Five-Year Plan, and huge market reforms and procedures, which are expected to be introduced after the 18th National People of Congress. Energy efficiency and environmental protection, new materials, high-end manufacturing, agricultural, forestry, fishing and livestock, and cultural and entertainment sectors would be the hot picks.

Mr. Wu foresees that the tight liquidity and weak corporate earnings would continue to stem IPO activities and good valuation. As a result, he anticipates the A-share market will likely to close at about 170 new listings (40% fewer than 2011) and approximately RMB120-140 billion IPO proceeds (50-57% less than 2011) by the end of this year.

# # #

Notes to editor:
Unless specified, all figures are updated as of 31 October 2012. A full list of key statistics of the indicators cited in the release with their year-on-year comparisons can be found in the Appendix in P.4.

Sources of the statistics for the Hong Kong IPO market: Hong Kong Stock Exchange, Deloitte Estimate, Bloomberg and include proceeds raised from the offerings of H-shares of Haitong Securities in 2012, and Hui Xian REIT, and the international offering of Glencore international Plc. in 2011.

Sources of the statistics for the A-share IPO market: China Securities Regulatory Commission, Deloitte Analysis and Estimate.


APPENDIX – KEY STATISTICS AT A GLANCE

Hong Kong IPO Market

  Jan - Oct 2012 Jan - Oct 2011 Percentage
change (%)
No. of new listings 51 64 (19)
IPO proceeds raised (HK$ billion) 489 2,214 (78)
No. of new listings by Mainland companies 33 36 (8)
Percentage of listings by Mainland companies 65 61 4
IPO proceeds raised by Mainland companies (HK$ billion) 411 964 (57)
Percentage of proceeds raised by Mainland companies 84 44 40
No. of new international listings 3 6 (50)
IPO proceeds raised by international listings (HK$ billion) 62.7 1,087.9 (94)
MB listing applications* 87 179 (51)
Active listing applications being processed* 64 106 (40)
Lapsed listing applications* 51 45 12
Rejected listing applications* 7 1 600
Withdrawn listing applications* 9 0 0
Average deal size (MB) (HK$ million)*** 8.79 11.57 (24)
Average deal size (GEM) (HK$ million)*** 98 94 4
Average first-day return of new listings (%) 6.2 6.8 (0.6)
Under-subscription rate of new listings (%)# 41 22 19
Over-subscription rate of new listings (%)# 59 78 (19)


*As of 30 September 2012
***Excluding mega deals of over US$1 billion.
# For new listings on Main Board only.

Mainland IPO Market

  Jan- Oct 2012 Jan- Oct 2011 Percentage
change (%)
No. of new listings 153 243 (37)
IPO proceeds raised (RMB billion) 1,034 2,495 (59)
Listing applications in the queue** (MB, SME Board & ChiNext) 787 N/A N/A
Approved listing applications** 91 N/A N/A
Suspended listing applications** 23 N/A N/A
Listing applications on hold** 2 N/A N/A
Withdraw and rejected listing applications** 59 N/A N/A
Average deal size (MB) (RMB billion)**** 13.3 26.2 (49.2)
Average deal size (SME Board) (RMB million)**** 6.46 9.41 (31.4)
Average deal size (ChiNext) (RMB million)**** 4.75 6.34 (25.1)
Average first-day return (%) 18.3 14.7 3.6
Under-subscription rate (%) 0 0 0
Over-subscription rate (%) 100 100 0

**As of 26 October 2012
**** Excluding mega deals of over RMB5billion

Contacts

Name:
Wilfred Lee
Company:
Deloitte Touche Tohmatsu
Job Title:
Public Relations Senior Manager, Clients & Markets
Phone:
Email
wilflee@deloitte.com.hk
Name:
Bonita Chan
Company:
Deloitte Touche Tohmatsu
Job Title:
Manager, Clients & Markets
Phone:
Email
bonchan@deloitte.com.hk
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