A-share market takes the limelight due to the early success of STAR, HKEX regains global IPO crown by deals and proceeds

EY today released the report Mainland China and Hong Kong top world’s IPO market amidst uncertainties, which concluded 2019 IPO activities in the world and Greater China and highlighted the outlook in the upcoming year. Due to trade tension, investor skepticism and geopolitical uncertainty, global IPO is expected to see a YOY decrease in both deal volume (1,115, down 19%) and proceeds (US$198.0b, down 4%). Technology continued to lead global IPO activities in terms of deals and proceeds in 2019. Driven by large IPOs in 2H2019, the Hong Kong Stock Exchange (HKEX) ranked top among global bourses by both deal volume and proceeds. Thanks to the early success of the science and technology innovation board (STAR), Shanghai Stock Exchange (SSE) ranked third among global bourses by deals and fourth by proceeds. Three out of the global top 10 IPOs came from mainland China and Hong Kong, namely Alibaba, Budweiser APAC and Postal Savings Bank of China (PSBC).

Terence Ho, EY Greater China IPO Leader says:
“In 2019 Q4, Saudi Aramco and Alibaba’s IPOs, the largest global deals, drove the IPO market upward which was sluggish throughout much of 2019. In the coming year, we expect some of the geopolitical and trade uncertainties to subside, but the IPO market will continue to fluctuate. Companies proposed to be listed need to make early preparation to seize opportunities arising from the market in 1H2020.”

A-share market saw huge increase in deals and proceeds

In 2019, 200 companies are expected to be listed on the A-share market, raising RMB252.8b, with a YOY increase by deals (90%) and proceeds (82%), hitting a record high since 2012, which was mainly due to the early success of STAR and mega IPOs with funds raised over RMB10b. IPO activities on A-share became more robust in 2H2019, when a total of 136 companies were listed and funds raised amounted to RMB192.4b, representing 68% and 76% of total deals and proceeds respectively.

Driven by four mega IPOs with funds raised above RMB10b in 2019 compared with one in 2018, average proceeds on the A-share market remained at a high level over the past seven years, second only to the highest level in 2018. Like 2018, SMEs dominated IPO activities, more than 60% of IPOs funds raised below RMB5b.

In terms of industries, the launch of STAR boosted TMT IPO activities that overtook industrials as the largest sector by deals; large IPOs including PSBC and CZ Bank pushed up proceeds from financials, which ranked top by funds raised. By regions, Guangdong and Beijing led other regions in IPOs by deals and proceeds respectively; compared to prior year, 28 companies based in Beijing were listed successfully, up 211% by deals; more than 50% of IPOs from Beijing came from TMT, 40% were listed on STAR.

Four out of top 10 IPOs came from STAR

In 2019, proceeds of top 10 IPOs amounted to RMB100.6b, up 49% compared with prior year, four came from STAR, with proceeds of RMB20.8b, representing 21% of total funds raised by top IPOs. IPOs on STAR ranked first and second by deals (35%) and proceeds (32%) respectively among different boards on the A-share market. In terms of industries, new generation information technology led IPOs on STAR by both volume (44%) and proceeds (58%), followed by biology (volume 24%, proceeds 19%). In terms of listing standards, 90% companies preferred listing standards I, i.e. the market capitalization of the listed company is not less than RMB1b, the net profit in the last two years is positive and the cumulative net profit is not less than RMB50m or the net profit in the last year is positive and the revenue is not less than RMB100m. First-day returns on STAR reached a peak of 298% in August but dropped to 54% in December. Although supply and demand improved and investors acted rationally, first-day returns on STAR remained higher than other boards. In terms of first-day returns on Dec 16th, ChiNext (177%) ranked first and STAR (73%) ranked last.

Vivien Zhang, EY¹ Assurance Partner, believes the innovation of STAR on listing standards, registration system, IPO pricing, trading and delisting rules lays a foundation for deepening the reform of the A-share capital market. She says, “Since the launch of STAR, the IPO market has performed steadily, investors showed great enthusiasm and various mechanisms have taken effects. For example, the registration system focuses on information disclosure, simplifies and optimizes listing standards and empowers investors to make choice, which has greatly enhanced the efficiency of resource allocation in the capital market and promoted the reform of other boards such as GEM and New OTC.”

Due to steady performance, STAR boosted enthusiasm from companies to float shares. As of 16 December 2019, there were 420 companies in the IPO queue list of the China Securities Regulatory Commission (CSRC), representing an increase by 51%. IPO backlog resumed growing. For STAR, there were 161 companies in the IPO queue list of SSE. The rate of IPO application approval increased to 88% in 2019, 30 percentage points higher than that of 2018. After spot checks kicked off in 2H2019, the rate of IPO review termination grew significantly, representing an increase of 170% compared to 1H2019.

Large IPOs pushed up proceeds from TMT in Hong Kong

It is estimated that 159 companies were listed on the Hong Kong market in 2019, with a YOY decrease by 22%; and the funds raised amounted to HK$310.5b, with a YOY increase by 8%. Driven by larges IPOs, funds raised in 2H2019 amounted to HK$238.7b, accounting for 77% of total proceeds in 2019. More than 60% of IPOs came from companies on the Mainland, whose funds raised accounted for 76% of the total; compared with 2018, proportion in deals increased while proceeds dropped. As the GEM Streamlined Process for transferring to the Main Board was removed and its minimum listing requirements are akin to those of the main board, GEM lost its appeal. In 2019, a total of 15 companies were listed on GEM, accounting for 9% of the total deals, falling to the lowest level since 2011.

In 2019, funds raised by top 10 IPOs amounted to HK$209.3b, accounting for 67% of total proceeds in Hong Kong. Driven by Alibaba’s IPO, TMT took the limelight and led IPO activities by proceeds. Funds raised by Alibaba accounted for 92% of total proceeds from TMT. By deals, retail and consumer products ranked top, while larges IPOs pushed up proceeds, making it rank second in Hong Kong by proceeds in 2019. Moreover, driven by IPOs from property service companies as a result of sector expansion, real estate ranked among top five industries by both deals and proceeds.

This year, a total of 21 overseas companies were listed in Hong Kong with proceeds of HK$4.9b, representing a YOY increase. Southeast countries continued to dominate cross-border IPO activities in Hong Kong, 13 companies were from Singapore. In terms of industries, retail and consumer products together with construction and infrastructure led cross-border IPO activities in Hong Kong.

Nasdaq is the key IPO destination for companies from mainland China and Hong Kong

Despite downward trend of global IPO activities, China remained the key source of cross-border IPOs. In 2019, 34 companies from mainland China and Hong Kong were listed on US exchanges, with proceeds of US$3.643b, down 13% and 62% by deals and proceeds respectively compared with 2018. Among them, 30 companies from mainland China and Hong Kong were listed on Nasdaq with proceeds of US$2.854b, representing 88% and 78% of the total number and proceeds of US-listed IPOs from mainland China respectively. King Li, EY² Assurance Partner, says, “In 2019, online consumption and online entertainment ranked top two industries by proceeds among US-listed companies from mainland China and Hong Kong, with a reflection of companies flocking for IPOs as a result of robust growth. From industry's perspective, the key source from IPOs has been shifted to online entertainment and consumption companies represented by Douyu.com and Luckin Coffee in 2019, from e-commerce companies in 2014 and FinTech and education companies in the past two years, showing that companies need to raise funds when expanding to a certain scale.” In addition, first-day returns of US-listed companies from mainland China and Hong Kong fell by 4 percentage points and the rate of IPOs whose stock prices were lower than their issue prices on the first trading day increased by 4 percentage points due to uncertainties including the China-US trade tension.

IPOs on the A-share market is expected to remain robust in 2020

This year, IPO backlog resumed growing. Proactive fiscal policies and flexible and appropriate monetary measures will drive the capital market upward. 5G technology is also expected to drive the IPOs of innovative tech companies. Thus EY expects IPOs on the A-share market to remain robust in 2020. Vivien Zhang adds, “With stronger IPO and delisting regulations, A-share delisting tends to become normalized and marketized and capital market reform will continue to go deeper. Besides, the CSRC’s support to qualified Taiwan-funded companies to float shares in mainland China will have a positive impact on the A-share market”.

For the year to date, encouraging biopharmaceutical companies to float has been listed as a priority. Driven by the launch of STAR and growth of listing companies, biopharmaceutical companies have witnessed rapid development. As such, biopharmaceutical and innovative pharmaceutical companies are expected to be main targets for investment in the years to come, King Li adds.

Companies are likely to be listed in Hong Kong through secondary or carve-out listing

Terence Ho says, Hong Kong’s IPO activities may slow in 2020 against headwinds. The success of Alibaba’s IPO may boost IPOs from more Chinese companies listed overseas through secondary listing. Meanwhile, more companies from mainland China are expected to be listed in Hong Kong through carve-out listing due to its relatively lower entry requirements. As the HKEX released additional measures and continued to deepen reform, new policies have taken effects in the new economy sector. It is expected that new economy companies including TMT and health care companies will remain a growth engine of IPO activities while traditional sectors including retail and consumer products, real estate and financials are set to drive growth as hot topics in Hong Kong. Moreover, Hong Kong is expected to face downside risk due to the slow economy or market as a result of trade tension and geopolitical uncertainties. However, EY predicts Hong Kong will see steady performance against ongoing headwinds with estimated funds raised of HK$220b. On the other hand, the amount will reach to approximately HK$350b if there are mega IPOs in Hong Kong next year.

¹ Ernst & Young Hua Ming LLP
² Ernst & Young Hua Ming LLP

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About data

The global IPO data in the press release are based on priced IPOs from 1 January to 5 December 2019 and expected IPOs by end of December. The mainland China and Hong Kong data are based on IPOs as of 16 December 2019 and predicted IPOs as of 31 December 2019. The other IPO activities during January to December 2019 are based on the priced IPOs as of 16 December 2019 and predicted IPOs as of 31 December 2019. 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.

Terence Ho, EY Greater China IPO Leader (middle), Vivien Zhang, EY Assurance Partner (left), King Li, EY Assurance Partner(right)

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Yang Wang, EY Assurance Partner (middle), Lawrence Lau, EY Assurance Partner (left), Cheekong Lai, EY Assurance Partner(right)

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(From left) Jacky Lai, EY Hong Kong Assurance Partner; Ringo Choi, EY Asia-Pacific IPO Leader; Peter Chan, EY Hong Kong TMT Assurance Leader

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