Hong Kong’s IPO market outlook in 2021

Published on 20 December 2020

Dickie Wong, executive director for research at Kingston Securities, tells us which sectors will thrive in 2021 for new issuance, including the effect of regulatory changes that have slowed the IPO of Ant Financial on other fintech firms.

Dan Barnes Welcome to Primary Markets TV, Asia Pacific – your update on newly listed securities for this week, and of course, those listed over the past month. I’m Dan Barnes. Coming up this week, we’re expecting IPO’s for 29 companies across the region; with ASX, Hong Kong Exchange & Japan’s Exchange leading the charge on the majority of those. In the fixed income space, we continue to see strong issuance of corporate bonds. If you look at emerging market data overall, Asia has been the leader this year for issuance of credit, according to data from Morgan Stanley Research. Last week we saw some major IPOs from JD Health and POP MART, both in Hong Kong. Joining me now is Dickie Wong, executive director of research at Kingston Securities in Hong Kong. Dickie, welcome to the show.

Dickie Wong Thank you, Dan.

Dan Barnes We’ve seen a lot of IPO activity in Hong Kong over recent months. Can you tell me what’s your expectation for continued activity for new issuance securities, at the end of this year and then going into 2021?

Dickie Wong Well, honestly speaking the general IPO market, it’s quite hot in Hong Kong, there’s no question about that. Even ANT Group failed to be listed in Hong Kong and mainland China just a month ago. We can see a lot of IPO just only for the last month, there are almost 20 new companies listed in Hong Kong. We can see some of the IPO received huge appetite from local investors and also institutional investors, like some of the big names you may actually have heard of, like JD Health, and POP MART, the local charge received a hundred times oversubscribed. And even on its first debut, the share price shot up quite significantly. Even like JD Health, as I just mentioned, and also POP MART, listed today actually went up 80% on it’s first debut. So, we can see a clear tendency that local investors, they like to participate and IPO is just like a jackpot. Or maybe they can win instant money, so after the listing, 80% gain on its first debut. But we can see the tendency of local investors, they are now smart enough to participate in not all of the IPO, because of what I’ve just mentioned. Most of the IPO listed in the past two months, actually, more than 30 percent of them, they’re now still trading below their IPO offering price. So, not all IPO went up quite significantly in the past two months, only a few of them. Especially, they have something in common, for one, they receive a huge amount of oversubscribed and the local investors challenge. And second, they may be one of the leading companies in their own industry, or even they are maybe the largest company in their industry. And for some of the IPO, the reason why, it’s because they’re very high, because their market cap is large enough to be included into all, like; Han Sang, MSCI and FTSE. So, into all worldwide indexes, like JD Health. So, that’s the reason why we always talk about the IPO market as simply a supply-and-demand game. When the local investors participate and also institutional investors demand is so high, therefore it will drive up the share price quite significantly even on this first debut.

Dan Barnes Very much so. You mentioned that about big institutional investors and retail investors. I mean, proportionately, what’s the sort of balance between those two investor groups for the big IPO”s such as JD health and POP MART.

Dickie Wong OK, so for all the companies that raise money in Hong Kong, like more than 10 billion Hong Kong dollar, the clawback system will be changed. Normally, 10% will be for the local investor, 90% for institutional investors. It all depends on the local investor and how hot is the IPO? If the local branch received more than one hundred times oversubscribed, then the clawback mechanism will just claw back 40% shares to the local charge. So, it will split into half-half, 50% for international and 50% for local. So in this case, you may think that those institutional investors may not have received enough shares. So on the first debut, sometimes they do jump into the market and buy at a significant premium over its IPO price. This is not something so surprising, because as I’ve just mentioned, like JD Health, they will be included into some of the the Hang Seng composite index and also MSCI and FTSE. And we have to bear in mind any single stock will be included, but not the Hang Seng index; we’re talking about the Hang Seng components index. And the larger and medium-sized firms, if they are included, then they may be included into the Stock Connect, so the Shanghai, Shenzhen and Hong Kong Stock Connect which mainland investors can also participate. So this is the reason why JD Health shot up quite significantly in just a couple of days. But honestly, when we talk about what is fundamental, no matter if it’s POP MART, it’s only a toy manufacturer, but the market cap is 100 billion. Can you imagine, 100 billion Hong Kong dollars? It’s really huge. So, we talk about valuation, honestly speaking, is simply too expensive.

Dan Barnes Yeah, that’s really interesting. Thank you. And then weøve talked about JD Health of course. JD Health is part of a larger group, JD.COM, that has been broken off. But it does follow another trend, which is that we’re seeing health firms, pharmaceutical firms listing a lot, and having a lot of appetite amongst investors for picking up those shares. We’re also seeing other trends, whether it’s ESG, so a lot of issuance focused on the gold market, too. Which sectoral trends do you think are most interesting and happening this year? And then which do you think will carry through into 2021?

Dickie Wong OK, we can see like some of those technology, Internet-related, and also the e-health-platform shares receive significant, overwhelming participation, no matter the local or institutional investor. But I think this trend may continue to move to 2021. Actually, I want to bear in mind the Chinese government, they recently introduced a lot of new regulations to regulate all those Internet-related companies, especially they seized ANT Group’s IPO, and they may have more control on those financial related incidents. But for other sectors like JD Health, they’re actually in a better shape. We have to bear in mind there’s still a very oligopoly situation in mainland, because there are only a few players in this area. And all those big names like Tencent, JD and Alibaba, they’re all the same. So what we can see, the regulation risk will be the key risk to us next year for those IPO. But I’ll actually pay more attention to consumer cyclical and also consumer related companies that focus their business in mainland China. I think they can have a better shape, because I really don’t think that the tension between China and US will be eased in the near future. So even if Biden will be the next U.S. president, I still don’t think the situation will help a lot. So therefore, I actually will have a more bullish counter-view towards those mainland-focused, consumer-related, or consumer-secret hold sectors.

Dan Barnes Dickie, that’s been great. Thank you so much.

Dickie Wong Thank you, you’re welcome.