IPOs spawn growth amid uncertainties

Despite all the fluctuations and uncertainties in the stock market in the first few months of the year, the IPO scene is still worth investors' closer look to figure out the market direction, insiders said.

The A-share market may prove to be one of the few highlights globally in terms of IPOs in the first quarter. Although only 85 IPOs were recorded during the period, down 15 percent year-on-year, total financing surged 136 percent year-on-year to 179.9 billion yuan ($27.2 billion), according to Deloitte, a global provider of audit, consulting, tax and advisory services.

The Shanghai Stock Exchange was the world's largest listing venue for new shares in the first quarter, recording 37 IPOs whose total financing reached 116.6 billion yuan, according to Deloitte. This can be largely attributed to the big-ticket return of China Mobile to the Shanghai bourse at the beginning of the year.

The Shenzhen bourse ranked third worldwide in terms of IPO value in the first quarter, with 41 debuting companies raising 62.1 billion yuan. The Beijing Stock Exchange, which commenced trading in November 2021, saw seven IPOs that netted 1.2 billion yuan in all.

A-share IPOs, which are not totally immune to geopolitical tensions and global uncertainties, are still worth a close look since volatility has been rising in global stock markets, said Hu Ke, Deloitte China's audit and assurance partner.

Experts said the central government's economic plans could spawn growth opportunities for small to medium-sized manufacturing, technology, medical and pharmaceutical companies, which are expected to account for a bulk of this year's IPOs.

The 14th Five-Year Plan (2021-25) for the development of China's pharmaceutical industry states that the industry's operating income and total profit should both register average annual growth of more than 8 percent during the period.

The Ministry of Industry and Information Technology said the majority of manufacturing companies with an annual sales revenue of at least 20 million yuan should realize digitalization by the end of 2025.

The operating income from the robotics industry, the MIIT said, should grow at an average annual rate of over 20 percent when the monitoring period ends.

The tech-heavy STAR Market in Shanghai will see up to 200 IPOs this year, with their proceeds estimated at 250 billion yuan. Up to 240 companies are likely to list on the tech-heavy ChiNext in Shenzhen, Guangdong province, and may raise 180 billion yuan. The main boards of the Shanghai and Shenzhen bourses will see 150 IPOs by the end of this year and could raise over 230 billion yuan, Deloitte said.

The registration-based IPO mechanism will help expand the market scale and drive up the size of each IPO this year, said Hu.

Outside the Chinese mainland, the IPO scene in Hong Kong offers a contrast, with only 15 new companies listing in the first three months of the year, down from 32 during the same period of 2021. The 15 IPOs raised HK$13.6 billion ($1.73 billion), down by as much as 90 percent from the 2021 level.

Deloitte experts said the drastic contraction of Hong Kong's IPO market can be largely attributed to uncertainties and a not-so-optimistic outlook arising from the Russia-Ukraine conflict and the resurgence of the COVID-19 pandemic in some parts of the Chinese mainland.

However, Deloitte said it still expects 120 IPOs to raise HK$330 billion in Hong Kong this year. Investors will be more interested in IPOs of companies from industries like medicine, technology, media and telecom, or those related to the ESG－environment, social and governance－theme.

Investors should closely watch the return of US-listed Chinese companies to the Hong Kong stock market, which will become a major highlight in the following months, experts from KPMG, a professional services provider, said.

The US Securities and Exchange Commission has been targeting US-listed Chinese companies since the beginning of the year. It added more than 80 companies to its list of entities facing possible expulsion from US exchanges on Wednesday for allegedly failing to meet the US audit requirements stated in the Holding Foreign Companies Accountable Act (HFCAA).

With that, altogether 105 US-listed Chinese companies have been put on a provisional list of issuers identified under the HFCAA. Although top regulators continued talks to settle the dispute, these companies still face the risk of being delisted from the US stock market in 2024.

Yet, the number of Chinese companies dual-listed in Hong Kong and the United States has been rising. Given the uncertainties for US-listed Chinese companies, Hong Kong will continue to serve as the prime option for a return to the domestic market, said KPMG.

Another highlight of Hong Kong's IPO market in the first quarter has been the debut of Aquila Acquisition Corp, the first SPAC company－a special purpose acquisition company, a shell company listed on a stock exchange for the purpose of acquiring a private company. Aquila started trading on March 18 and raised HK$1 billion. This was only two months after the SPAC listing mechanism took effect on the Hong Kong bourse.

Deloitte estimated that there will be at least 20 flotations of SPAC companies in Hong Kong by the end of this year, each raising at least HK$1 billion.

Irene Chu, partner and head of new economy and life sciences at KPMG China, said she expects the first SPAC acquisition to be completed before year-end. The SPAC mechanism has shown the Hong Kong bourse's resolve to further promote the city's competitiveness as a financing hub, she said.