Many would think Christmas has come early for China by looking at the flux of positive headlines lately, from a possible thaw of her ties with the US, a long-awaited easing of COVID-19 restrictions, and a series of measures intended to let the country’s cash-strapped property developers take a breather.

Chinese stocks traded on the A-share market, in Hong Kong and the US, have all rebounded. The Hang Seng Index has risen 32.4% since hitting multi-year lows in October. China’s SSE Composite Index has advanced 11.1%, while S&P China ADR Index has rebounded by 50.5%.

“We are seeing additional amounts of activity with deals getting done, but not seeing yet a return of (decent size deals), which I don’t expect to happen until the first quarter next year at the earliest, as we need overseas capital and long funds to come back,” an equity capital market lawyer says about Hong Kong initial public offerings.

Overseas funds are watching closely the COVID situation in China, global inflation and Russia’s attacks of Ukraine before determining when and if they would come back to Asia, the lawyer says.

John Lee, UBS vice chairman and head of Greater China, and another senior ECM banker, say Greater China equities have pretty much bottomed out.

An investor covering Hong Kong also shares the notion that a meaningful recovery of Hong Kong’s IPO market, or a return of deals valued USD 500m or above these days, would be more of a mid-term prospect towards the second quarter or mid-2023.

“We are having more deal dialogues about potential transactions. Frequencies have improved significantly from mid-2022,” the lawyer says, adding that most of the discussions are focusing on Hong Kong IPOs and global depositary receipt offerings, “not so much” about American Depositary Receipt offerings though, as political considerations remain when it comes to US listings.

Year to date, the city has printed just 64 listings for USD 12.5bn, which will almost certainly make 2022 the worst year after 2012, when 60 deals raised USD 11.61bn in total

Still, with the benchmark index on the rise, next year’s pipeline looks decent, Lee, the lawyer and the banker said.

So far this quarter, as many as 52 companies have filed for Hong Kong listings, based on Dealogic data, up from 43 in the quarter ended 30 September.

Lee and a second investor pointed out that the IPO market always take longer to recover than the secondary market when secondary valuations are cheap.

“If you are asking if the rallies of late make a compelling case to bet my money on IPOs, my answer is a NO, at least not yet,” the second Hong Kong investor says. “There is plenty of cheapness out there, why bothered about IPOs?”

He says investors may not pay much attention to IPOs until the Hang Seng Index reclaims the 26000-28000 mark, at which many of the pre-IPO rounds happened last year.

Lee is more optimistic, saying deal volume should gradually build up, especially as the index nears 23,000-24,000.  

In addition to an absence of long funds and undersold equities in the secondary market, the second investor adds issuers also need to manage their valuation expectations better.

“The gap is just too wide,” he says.

There are many casualties of valuation expectation mismatch. Look no further than Growatt Technology’s potentially USD 1bn Hong Kong IPO for an example.

Asked about how hopeful he is about Hong Kong’s IPO market next year, measured by a scale of one to 10, with one being super pessimistic, the banker says Hong Kong deserves a 10, while A-share may come in around 9 after a good run in the past few years.

New energy, electric vehicles and consumer titles will likely dominate next year’s HK IPO pipeline, says the lawyer.

Chinese ADRs: Politics of IPOs

Issuing ADRs remains challenging, says Lee, as companies still need to walk a tight rope.

 “I do believe China definitely wants to keep the option available, as some candidates simply make more sense to get listed the US especially those in the tech space.”

Chinese issuance of ADRs came to a near complete stop after ride-hailing services operator Didi Chuxing priced a USD 4bn NYSE initial public offering (IPO) in June 2021.

It was a hot deal, but a thorn in the eyes of Chinese authorities, who then set off a series of high-handed measures intended to rein in the country’s powerful technology companies, especially those owning sensitive data.

And the longstanding variable interest entities (VIE) structure, a regime through which nearly all the Chinese companies got listed in the US, became a problem for Beijing. The US market regulator, meanwhile, has also gone after Chinese companies, demanding full access to their audit reports.

All these happened as the Sino-US relationship plunged to decade lows.

But Chinese hotel chain Atour Lifestyle Holdings raised USD 60.1m from a US IPO in mid November 2022. To be sure, the deal size came all the way down from USD 286m targeted as early as June 2021. Still, the fact that the Cyberspace Administration of China, her Internet police, granted the company a greenlight for the US listing affirmed that China never banned ADR issuance altogether, say Lee and the banker.

The stock has risen 51% since debut on 10 November.

What’s clear to everyone is that as the US-China relationship remains on the mend, China has encouraged companies to get listed in Switzerland via GDR offerings. Market liquidity remains low for Chinese GDRs, but the channel helps China diversify its listing markets.

“We might even see Germany-listed Chinese GDRs at some point,” the lawyer says.

Home-made IPOs

China overtook both Hong Kong and the US by no small margins in 2021 to be the top listing exchange for Asian companies, Dealogic shows.

That continued into 2022.

A lack of clarity with China’s industrial policies and whether or when its ties with the US would return to normal has made Chinese companies hesitant about listing outside their homeland after all.

This has benefited China’s domestic exchanges.

Despite a 24% decline in China’s domestic IPO proceeds raised so far this year versus all of 2021, Shanghai and Shenzhen exchanges together still priced USD 70.5bn worth of IPOs year to date, 6x that raised in Hong Kong.

Still, for Chinese IPOs overseas to regain their luster, issuers need to learn to be more realistic with valuation expectations.