A last-gasp burst has put Hong Kong back on track to take the second spot among global IPO destinations for 2014. But the going may get tougher for the SAR in the coming year, especially with Shanghai breathing down its neck. Celia Chen reports.

Thanks to a massive HK$84-billion ($10.8- billion) rebound in initial public offering proceeds in December, Hong Kong is on track to becoming the second-largest IPO market globally this year, with a 33-percent increase in fund-raising from 2013.

That comes after the city's IPO market suffered what was believed to be a difficult year, dogged as it was by poorly performing deals before December. Funds raised via share listings during the first six months put together touched just HK$82 billion, still 2.4 percent below that garnered just in December.

To add to its woes, Hong Kong lost out on the world's largest IPO on record in September, when mainland e-commerce giant Alibaba Group Ltd decided to sell its shares in New York, raising $25 billion.

But even before losing the mega deal, the local stock exchange was in the doldrums, as fund-raising by its biggest IPOs in the first half of 2014 was far below expectations.

Henan-based WH Group Ltd, the world's biggest pork supplier, was forced to postpone its April debut on lukewarm investment response even after cutting the size of its IPO to $2 billion from the initially expected nearly $6 billion. It finally floated shares in July and raised $2.1 billion.

Hong Kong Electric Investments, controlled by top Hong Kong billionaire Li Ka-shing, drastically reduced earlier estimates to raise just $3.1 billion in its January float, which was priced at the bottom of its marketed range.

But the pace picked up in December. Dalian Wanda Commercial Properties, the biggest mainland developer of shopping centers and controlled by mainland billionaire Wang Jianlin, raised $3.7 billion in Hong Kong, making it the largest listing in Asia this year.

But it had a less than stellar debut, tumbling 2.6 percent from its offer price of HK$48 to HK$46.8 as concerns about high debt and slow sales offset optimism over a rebound in the mainland property market.

On the other side of the coin, CGN Power Co, the largest atomic energy producer on the mainland, raised more than $3.2 billion in its Hong Kong IPO earlier this month and surged 19 percent on debut on Dec 10.

Beijing-based carmaker BAIC Motor Corp Ltd, backed by German giant Daimler AG, raised $1.4 billion in December despite concerns a slowdown in the mainland economy may curb demand for new vehicles next year.

All in all, the Hong Kong IPO market will end 2014 on a high note, forecasts accounting firm KPMG, as certain sizable floats are expected to be completed by yearend - driving proceeds to a peak.

KPMG expects 109 companies to have listed in Hong Kong by the end of the year, the highest in a decade, with proceeds reaching HK$225 billion. That is 33 percent higher than the HK$169 billion recorded in 2013 when 97 IPO deals were completed.

Focus on drivers

But with spikes like the one in December unlikely to be repeated, what will drive the Hong Kong IPO market next year?

One promising area is financial services companies, which are expected to help the market remain strong in 2015, according to analysts.

Fund-raising is estimated to be sustained at the current level of about HK$200 billion, with sizable deals from financial services firms, and floats in the pharmaceutical and environment-related sectors.

Anticipated listings include those from lenders owned by mainland local governments, including the Bank of Beijing, Bank of Shanghai and China Guangfa Bank, and mainland insurers Anbang Insurance Group Co, Taikang Life Insurance Co and Sunshine Insurance Group.

"China International Capital Corporation Ltd, the mainland's first homegrown investment bank, reportedly postponed its Hong Kong debut to 2015 as the departure of the company's senior management in 2014 delayed its IPO plan," said Rebecca Chan, partner and head of Hong Kong capital markets group at KPMG China.

Financial asset management companies expect to be another driver for the Hong Kong IPO market in 2015 besides the banking sector.

"China Huarong (Asset Management Co Ltd) and China Orient (Asset Management Corp), mainly responsible for managing non-performing assets in the mainland for commercial State-owned banks, are expected to come to Hong Kong for their IPO plans next year," added Chan.

Other than financial services companies, Chan believes environmental protection and pharmaceutical sectors would be the hot picks of the Hong Kong IPO market next year.

Not only KPMG, fellow accounting giant Ernst &Young (E&Y) also expects financial services to be the major sector raising capital through local listings next year.

"With the acceleration of interest rate reform and more alternative funding sources, financial services companies are able to diversify their business," said Ringo Choi, Asia-Pacific IPO leader and managing partner at E&Y.

"Insurance exchanges and income tax-deferred pensions, which may be launched next year, are expected to drive significant growth of the insurance industry."

But Ben Kwong Man-bun, a director at securities firm KGI Asia, forecasts that these financial companies may see their floats evoke only lukewarm response as Hong Kong investors are concerned about the slowdown in mainland economic growth.

Other than financial sector listings, retail and consumption, and technology, media and telecommunications (TMT) firms are expected to be hot property for the Hong Kong IPO market in 2015.

But there are indeed some negative factors that may impact its performance next year.

"On the one hand, the mainland has adjusted its GDP growth target downward and developed economies such as Europe and Japan still face economic downside risks," said Choi. "On the other, expectations of an interest rate hike by the US Federal Reserve may lead to the outflow of hot monE&Y from Hong Kong."

Choi also stressed that civil activities in some areas of Hong Kong may cast some shadow over the city as an international financial center.

SAR working on appeal

Hong Kong, nevertheless, is striving to promote itself and increase its appeal as an IPO destination despite the hurdles. The stock exchange is seeking views on loosening its shareholder voting rules that spurred Alibaba Group Holding Ltd to choose the US for what has been the world's biggest IPO this year.

Hong Kong should accommodate new share-holding and management structures to allow companies following different legal structures to conduct IPOs, a government advisory panel said.

Chan from KPMG believes it is a good time to review existing rules and practices. But Choi from E&Y is skeptical of adopting a "minority-control voting structure", and said: "It is not necessary for Hong Kong."

"Hong Kong can maintain its appeal as an IPO destination as long as the city maintains market transparency and protects investor rights," he said. "But indeed, there will be more TMT companies coming to Hong Kong to conduct their IPOs if a 'minority-control voting structure' applied in the city."

As for the "full circulation of H-shares", Choi is more supportive, saying it will spark bullish sentiment in the IPO market.

"Full circulation of H-shares, if approved, will stimulate dealings of Hong Kong-listed shares and increase the total market value, thereby attracting more institutional investors and encouraging mainland companies, especially those privately owned, to list in Hong Kong," he said.

The Shanghai-Hong Kong Stock Connect program, KPMG said, will not adversely impact the SAR's status as a hot listing destination in the short term.

But it cannot be denied that the weak market reception for the through-train program, launched on Nov 17, has disappointed investors speculating on a short-term boost in the Hong Kong stock market.

The mainland A-share market, however, by virtue of being combined with the Hong Kong equity market, could eventually become one of the world's largest and most active stock markets.

Contact the writer at celia@chinadailyhk.com

Although Alibaba IPO's shift to the US caused a stir in Hong Kong, yet the city could still impress the market with transparency and protection of the rights of investors heading towards the world's second-largest IPO destination. Parker Zheng / China Daily

(HK Edition 12/29/2014 page6)