- Despite COVID-19, A-share market saw huge increase in IPO deal volume and proceeds, hitting a decade high on fund raising; Shanghai Stock Exchange (‘SSE’) ranked top among global bourses by deal volume.
- Hong Kong Stock Exchange (‘HKEX’) ranked fourth and second among global bourses by deal volume and proceeds respectively; deals from new economy and real estate sectors pushed up the total funds raised; the secondary listing of China concept stocks and the subscription of new shares took the limelight; Hong Kong market is expected to see optimism in 2021 with estimated funds raised of HK$350b.
EY today released “Mainland China and Hong Kong IPO” report, concluded 2020 IPO activities in the world and Greater China and highlighted the outlook in the upcoming year. Despite COVID-19, global IPO is expected to see a YOY increase in both deal volume (1,338, up 17%) and proceeds (US$265.4b, up 27%). While in Greater China, mainland China and Hong Kong saw strong performance with a YOY increase by both deal volume (49%) and proceeds (55%), representing 40% and 45% of the total deals and proceeds as they suffered less from COVID-19.
Driven by epidemic control efforts in mainland China and ongoing development of STAR, the SSE ranked top by deal volume while the HKEX ranked fourth and second by deal volume and proceeds respectively among global bourses in 2020. Globally, top three deals came from Greater China, namely Semiconductor Manufacturing International Corporation, JD.com, Inc. and Beijing-Shanghai High Speed Railway Co., Ltd. In terms of industries, the technology sector continued to dominate global IPO activities in 2020.
Ringo Choi, EY Asia-Pacific IPO Leader says, “Although COVID-19 hits the global economy, global IPO markets remained resilient and IPOs continued to grow in 2020. In particular, mainland China and Hong Kong saw strong performance by both deal volume and proceeds. Under the new normal, companies intended to seek opportunities to get listed to expand capital base and inject new impetus into future development with an attempt to navigate uncertainties in the year ahead.”
EY Greater China IPO Leader
A-share market hits decade high on fund raising despite COVID-19
In 2020, 395 companies are expected to be listed on the A-share market, raising RMB470.7b, with a YOY increase by deals (97%) and proceeds (86%), hitting a record high since 2010 by proceeds, which was mainly due to the implementation of a registration-based system and mega IPOs with funds raised over RMB10b.
The average proceeds on the A-share market remained at a high level in recent years, reaching RMB1.192b, while the number of IPOs remained flat compared with the prior year with a total of four mega deals raising funds over RMB10b. In 2020, SMEs continued to dominate IPO activities and IPOs with funds raised below RMB1b represented more than 30% of the total deals, rising slightly compared with the previous year.
In terms of industries, mega deals boosted TMT IPO activities to become the largest sector by funds raised and industrial products ranked top by deals. By regions, Jiangsu and Shanghai led other regions in IPOs by deals and proceeds respectively; compared to the prior year, 42 companies based in Beijing were listed, up 50% by deals, while in terms of proceeds, Beijing ranked second after Shanghai.
Registration-based system boosted IPO activities and STAR overtook mainboard to lead in IPO activities by both deals and proceeds in A-share market
In October 2020, the State Council stated that the registration-based system would be implemented step by step in an all-around way. An increasing number of companies got listed on ChiNext after the registration-based system landed, and the number of IPOs and funds raised represented 59% and 74% of the total deals and proceeds from ChiNext in 2020 respectively. Meanwhile, STAR overtook the mainboard to lead in IPO activities by both deals (37%) and proceeds (47%) in the A-share market. Total funds raised by top 10 IPOs on A-share amounted to RMB141.7b, up 41% compared with the prior year. Seven out of top 10 IPOs came from STAR, with proceeds of RMB83.9b, representing 59% of the total of top 10.
Under the registration-based system, the issuance of new shares adopted a market-based inquiry, pricing and ration for the sale mechanism with institutional investors as market entities. By so doing, the issuance of new shares has become more market-oriented. The first day return rates on both STAR and ChiNext after the implementation of the registration-based system exceeded 100%. Specifically, the average first-day return rate on STAR was 187% while that on ChiNext reached 158%, far above the limit up of 44% under the review system.
Jacky Lai, Assurance Partner, Ernst & Young, Hong Kong, believes the implementation of the registration-based system will boost innovation in the key systems of capital markets and help develop a more inclusive multi-level capital market which therefore will deepen the reform of A-share market. He says, “The reforms of the registration-based system and the delisting system are integral to improve the quality of listed companies, thus allowing the fittest to survive.”
The registration-based system further boosted IPO activities. As of 18 December 2020, there were 802 companies in the IPO queue list of the China Securities Regulatory Commission (CSRC), 76% of which were applying for IPOs under the registration-based system. The IPO application approval rate increased to 95%, 6 percentage points higher than that of 2019. It is expected that the number of companies in the IPO queue list will remain at a high level and a growing number of companies will get listed under the registration-based system.
New economy and real estate companies pushed up the proceeds from the IPO market in Hong Kong
In 2020, it was estimated that 144 companies would list in Hong Kong, raising a total of HK$390.5 billion. IPOs dropped by 11% by volume but proceeds increased by 24% YOY. IPOs in Hong Kong were affected by COVID-19 in the first half of the year. Major IPOs and the return of China concept stocks in the latter half of the year pushed up the total proceeds of the year.
Top 10 IPOs in 2020 raised a total of HK$184.3 billion, accounting for 47% of the total of the year. Five of them were the secondary listing of China concept stocks and 56% of total proceeds were from these companies. By industry, 61% of the proceeds of the top 10 IPOs were from new economy companies. The stock performance of JD.com Inc and its subsidiary, JD Health, was outstanding. They were the top two in terms of IPO proceeds.
In addition, there was an explosive growth of IPOs of real estate management companies this year, pushing the real estate industry to number one position by IPO volume. TMT industry was number one by IPO proceeds and number two by IPO volume. Health care industry IPO activities attracted attention as well, the industry was among the top five by IPO volume and proceeds. Performance of the financial industry IPO was mediocre. Only six financial services companies were listed in Hong Kong in the year, and the industry was no longer among top five in IPO volume.
This year, 13 overseas companies were attracted to the Hong Kong IPO market, raising a total of HK$1.6 billion, which the volume and proceeds were lower YOY. All overseas companies came from Southeast Asia, seven of which were from Singapore, construction and infrastructure was the industry with the largest number of IPOs from overseas companies.
Secondary-listing China concept stocks and subscription of new stocks became the most popular stocks in Hong Kong
In 2020, nine China concept stocks which are listed in the US returned to Hong Kong for secondary listing, raising a total of HK$131.3 billion which accounted for 34% of the total proceeds. Secondary-listing China concept stocks are mainly from TMT, retail and consumer goods, transportation and logistics, education and health care industries. Such stocks are welcome by investors and all of them were oversubscribed with an average rate of 68.
Meanwhile, 93% of the stocks listed on the main board were oversubscribed this year, an increase of 7 percentage points YOY. The oversubscription level of the top 10 was generally higher than that last year. The oversubscribed rate of Ye Xing Group stocks was highest, at 1,948 times. When compared with the same period last year, investors were very enthusiastic in new stocks and the average oversubscription rate was 206 times, an increase of 227% YOY.
China concept stocks are overall active amid challenges
Although cross-border IPO activities around the world were affected by the pandemic this year, China is still an important source of IPO companies. The year 2020 saw 35 mainland Chinese companies listed in the US, raising a total of US$12.32 billion. IPO volume flatted but proceeds increased by 233% over 2019. There were 25 mainland Chinese companies listed on NASDAQ but only 8 on the New York Stock Exchange, raising a total of US$7.71 billion and the total proceeds of which accounted for 63% of the total by mainland Chinese companies in the US.
IPO activities of China concept stocks were not affected by The Holding Foreign Companies Accountable Act in the US. Peter Chan, EY TMT Assurance Leader, Hong Kong says, “Average return of China concept stocks on the first trading day in the US was 22% which was the highest in the last three years. China concept stock companies face tremendous challenges in recent years but the overall performance of the stocks is good and these stocks are welcome by investors.”
Numerous factors affect IPO activities in 2021
EY predicts that the IPO activities in the A-share market in 2021 will be affected by numerous factors. Jacky Lai, Assurance Partner, Ernst & Young, Hong Kong, says, “The world economy will resume growth next year after the pandemic but it is still the most variable factor. In addition, the development of Sino-American relationship after the election will also affect the economies of the two countries. However, the full implementation of the registration-based system in China will change the ecosystem in the A-share market. The 14th Five-Year Plan will support direct financing which will have positive impact on the capital market and IPO activities.”
Return of China concept stocks and listing of new economy stocks became the growth engine
Ringo Choi, EY Asia-Pacific IPO Leader, thinks that with more speedy recovery of the economy in mainland China, Hong Kong will benefit from the development of the economy in mainland China. The Hong Kong economy is expected to recover next year. With the continuation of the return of China concept stocks, companies that meet the requirement in weighted voting rights may return to Hong Kong for secondary listing. In addition, it is expected that the scope of investment of Shanghai-Hong Kong Stock Connect will be expanded, therefore it has been estimated that new economy companies, such as TMT and health care companies, will still be a growth engine in the IPO market. Real estate, retail and consumer goods and other traditional industries in Hong Kong will still be another growth engine. However, the negative impact of the pandemic has not yet diminished and other unfavorable factors may have negative impact on the market. The Hong Kong economy is still facing downward pressure. EY predicts that IPO proceeds in Hong Kong will reach HK$350 billion in 2021.
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2020 data in the press release are based on priced IPOs from 2020 January to December 18, 2020 and expected IPOs by end of December. Sources of data include EY statistics, Wind, CSRC, Eastmoney, Hong Kong Stock Exchanges and Nasdaq.
This news release is issued by the EY China practice, a part of the Ernst & Young global network.