Why Hong Kong Stocks Are Catching a Second Wind

By Jiaxiang Shi

After years of relative stagnation, the Hong Kong stock market is finally seeing a turnaround in Q4. Following the IPOs of Midea Group and China Resources Beverage, Horizon Robotics listed today. Still in the pipeline are companies like Lalamove and Mingji Hospital. With the Federal Reserve's rate-cut outlook now clearer, the Hang Seng Index posted several consecutive days of sharp gains before pulling back.

"Looking at both the number of new listings and filing applications, the past month has shown obvious growth compared to previous months — you could say Hong Kong IPOs have 'hit a mini-peak,'" a lawyer who has worked on Hong Kong IPOs told An Yong Waves. Based on her own caseload, whether companies inquiring about HKEX listings or newly launched projects, "there's been a rush to get things moving after the National Day holiday."

By deal count, IPOs haven't increased significantly compared to last year, but fundraising amounts have risen substantially. In its latest report, Mainland China and Hong Kong IPO Markets: Q3 2024 Review, KPMG noted that Hong Kong IPO fundraising for the first three quarters reached HK$55.6 billion, up 120% year-over-year, returning the city to the global top four — just behind the Shanghai Stock Exchange. "Hong Kong IPO activity is regaining momentum," KPMG concluded.

Specifically, 45 new companies listed in Hong Kong during the first three quarters, raising HK$55.6 billion total. Though that was two fewer listings than the same period last year, total fundraising increased roughly 123%.

Multiple lawyers who have worked on Hong Kong IPOs summarized three factors behind this "mini-spring":

First, for most companies — especially smaller and mid-sized ones — A-share IPOs remain difficult. "Even the Beijing Stock Exchange's threshold is significantly higher than Hong Kong's."

"As soon as a company considers listing in Hong Kong, the biggest reason is that they can't meet A-listing requirements. Whether it's valuation, liquidity, ability to reduce holdings and cash out, fundraising capacity, or the amount raised in an IPO, Hong Kong simply can't compare to A-shares," said Jiang Jing, partner at Guohuan Law Firm.

Second, while Hong Kong has been depressed for years and listing often meant selling at a loss, an IPO is nonetheless necessary for companies to unwind repurchase obligations, and year-end is typically the deadline for valuation adjustment mechanisms.

Third, compared to other overseas markets, listing directly on the HKEX as an H-share preserves the possibility of returning to A-shares later — an advantage that listing in other overseas markets doesn't offer.

Xu Shunzhi, senior partner at Huashang Law Firm's headquarters, told An Yong Waves that according to incomplete statistics, the ratio of companies currently applying to list in Hong Kong using H-share versus red-chip structures is roughly 6:4. Compared to earlier years when the vast majority of smaller companies used red-chip structures, the H-share approach has become quite popular.

Lei Tianxiao, partner at JunHe LLP, added that post-listing fundraising efficiency in Hong Kong is high — follow-on offerings, placements, and convertible bonds can all be executed quite quickly. "The precision in capturing market windows is extremely high, which is very attractive to many companies."

Six days ago, Hong Kong's Securities and Futures Commission and the HKEX also announced further optimization of the new listing application review timeline, making the process clearer and more predictable. For companies already listed on A-shares, qualified firms applying to list on the HKEX can enter a fast-track process where both the SFC and the exchange will issue only one round of regulatory comments each, with their respective assessments completed within no more than 30 business days.

But weak liquidity and depressed valuations remain a Damocles sword hanging over companies choosing Hong Kong, with no signs of improvement. The exchange now seeing this mini-surge still falls far short of its former self, which seven times claimed the global IPO fundraising crown.

For companies looking to go public overseas, the US or Hong Kong is a multiple-choice question. According to Jiang Jing's observation, among projects coming to consult, over 70% are considering US listings versus roughly 20% for Hong Kong. Part of the reason is that US financial requirements and review standards are lower than Hong Kong's. "If we rate A-share review strictness at 100, Hong Kong is 70 or 80, and Nasdaq is only 60 or 70," Jiang said.

However, in the process of Chinese companies listing overseas, beyond needing CSRC overseas listing filing, companies in closely watched sectors must also pass cybersecurity review and meet data compliance and cross-border data transfer requirements. "Paradoxically, smaller internet companies find it easier to pass review and list in the US," Jiang also told An Yong Waves. For Chinese companies listing in the US, "in good years it's several dozen, in bad years a few dozen." Meanwhile, Hong Kong — which hosted over 200 mainland company listings in 2018 — clearly offers greater inclusiveness and capacity for mainland enterprises.

KPMG noted in its report that due to regulatory changes and broadly cautious market sentiment, A-share IPO activity remains sluggish. RMB fundraising dropped 75% compared to Q1-Q3 2023, with IPO counts down 70%.

Under these circumstances, Hong Kong IPOs have become an unavoidable choice for mainland companies seeking an exit.

Xu Shunzhi also noted that companies originally planning A-share listings have already completed股份制改制 (corporatization), so applying directly to the HKEX via the H-share model saves the time required for red-chip restructuring. Moreover, companies that had already filed for A-share guidance have compliance frameworks that mesh seamlessly with HKEX requirements. The HKEX also allows companies to file using 2 years plus 9 months of financial data, submitting the most recent full-year audited financial statements during the review process — saving at least three months on the timeline.

She therefore predicts that based on the past month, Q4 will likely become a peak season for Hong Kong IPO project launches, with the IPO surge continuing into next year. Jiang Jing also believes that given policy support for A-shares, the likelihood of continued IPO growth in Q4 is relatively high.

Short-term secondary market rallies do attract unlisted companies' attention, but a Hong Kong IPO is an 8-12 month "major project" involving standardization and structural adjustments. "What truly convinces companies to commit to a Hong Kong listing depends on the market's unique advantages and the expectation of long-term healthy market conditions going forward," Lei Tianxiao said.

Image source: IC Photo