IFR Asia: China’s reopening has stimulated economic activity, but the global banking crisis has made launching deals almost impossible. Are we going to see a rebound in China ECM activity for the rest of the year?
Barry Chan, CICC: Just a bit of a disclaimer: all of what I’m going to say is unofficial, and nothing to do with CICC. It’s all my opinion. If I’m correct, it’s all credit to me. If I’m wrong, then it’s my fault, not that of CICC.
Activity in the A-share market in 2022 was about half the overall volumes seen in 2011 – although there were still some significant IPOs in mainland China.
For 2023, well it’s not been a great start in Hong Kong. The value of IPOs dropped by half in the first quarter, and there’s a similar story in Shanghai. It’s left everyone asking: “Is it the end of the world?”
I have a more positive outlook as when things hit rock bottom, there’s always likely to be a bounce back.
What we’re all looking for is the signal that marks the start of the bounce.
There is pent-up interest and there is a strong pipeline – just look at the number of listing approvals on the Hong Kong exchange website. There are still a lot of companies interested in going to the capital markets.
You probably noticed that Premier Li Qiang, when he visited Shandong last week [the roundtable took place on May 30], mentioned the importance of confidence in stimulating consumption and enhancing the quality of life.
The government has been trying to boost confidence, to encourage people to spend – not just on consumer goods, but also on long-term investments.
I am optimistic, but it may take a bit of time for the fortunes of the market to turn around.
Zili Guo, UBS: It’s a simple question. But not an easy one to answer.
Essentially, we need to be patient. To wait and see how things evolve.
Just to compare the Hong Kong market issuance volume. Year to date in 2023, ECM deal value is around US$12bn, compared to full year volume last year of US$24bn.
By contrast, in 2018-2022 the average issuance volume was US$71bn. Issuance volume has declined big time.
The recent global banking crisis may be one of the reasons for the collapse in business but I think there are four main drivers of market volatility.
One is the expensive cost of capital. Over the past 10 years, cheap money funded a bull market. But that’s over. Everyone expects rates to peak at some point soon, but as to when exactly that will be, we’ll just have to wait and see.
The second reason is the China recovery story. Looking at the numbers for Q1 and April, perhaps the recovery is not as robust as was expected.
And the third one: I agree, market confidence does need more time to be restored. We need to see the major indicators, like Hang Seng index, or other indices, to perform well.
Lastly, and most importantly, there is just less liquidity in the system.
For the market to rebound we need to see the start of an easing cycle, a sustainable recovery in the China economy, and the sign of some positive aftermarket performance for new issuance.
I always say to my clients that a bull market is always three IPOs away. What kind of IPOs? Three successful, well-performing IPOs. Whenever we see three successful IPOs in the market, deals that make money for all investors, then the bull market will be back.
Currently, investors are looking for safety, liquidity and quality, in terms of the new issuance. Now, it’s only IPOs from sizeable issuers with high visibility, profitability or cashflow, that can work. Preferably those with a lower-than-expected valuation.
Sheng Chen, Baker McKenzie: Just like Barry and Zili said, we need time. And three significant, well-performing IPOs would help. But I just want to share some observations I’ve made during recent trips to mainland China, after meeting with investment bankers and potential issuers in Shanghai and Beijing.
There is a decent IPO deal pipeline, and many pipeline projects are just waiting for the right time to come to market. The second half of this year might remain difficult, but we are looking forward to next year. As lawyers, we are doing our best to get issuers prepared with respect to meeting documentation and other listing requirements to make sure issuers are ready to go when a window opens.
Samuel Chan, BLS Capital: In short, the answer is a definite yes, we will see a rebound. That said, we all know there’s been so much divergence between the US market and the Chinese market this year and, in Hong Kong, we’re in the centre of the vortex.
We all understand that there is a mountain of worries to overcome. Industrial economies are not rebounding as well as we were expecting, and we’ve not really felt the benefit of the stimulus effect yet.
But there is still hope. Rates in the US are peaking, and that will give the People’s Bank of China more flexibility in terms of the monetary policy – although how the government strikes a balance between fiscal stimulus and fiscal discipline remains open to question.
Yet, on the other hand, there are no lack of investment themes in the secondary market, even within Hong Kong and China: we’ve seen SOE reforms, artificial intelligence, advanced manufacturing – in which we’ve seen a lot of good performance, not only within Hong Kong and China, but also within Taiwan, Korea, and Japan.
The thematic investment themes in secondary will eventually filter through to the primary market and maybe in the second half of this year we’ll see more issuances.
IFR Asia: How will Chinese companies from different industries decide where to list?
Barry Chan, CICC: The company CFO will certainly consider regulations and investor demand when deciding on where to list. Let me give an example from many years ago – two and a half decades ago – that might help explain the thinking.
When CICC did its first IPO for China Mobile, it was listed not in Shanghai, but in Hong Kong and in New York. I was a junior at that time. Every week, I had to track the trading liquidity of China Mobile in Hong Kong versus in New York and I saw that the trading activities were about 80% in New York and 20% in Hong Kong.
What that showed was obvious. In 1997, when China Mobile was listed, there wasn’t a significant market in Shanghai.
Now Shanghai today is not the Shanghai of the ‘90s, but it shows that if you have a huge, significant transaction, then liquidity is important. You are forced to go to a more liquid market.
Another example is regulation. We all know that Alibaba’s first listing was not in Hong Kong, but in New York. And the reason was because Alibaba wanted to achieve a dual-class trading structure (A/B classes), and at the time, Hong Kong didn’t allow it. Alibaba had no choice but to go to New York.
And then there is the investor base. Taking Alibaba as an example, again. It came back to Hong Kong for a listing because of the rule change that allowed A/B shares, but also because its main activities, its clients, and most of its shareholders, are in China or, at least, in this part of the world. It made perfect sense for that company to come back to Hong Kong, to get close to the customer, the business customer, to get closer to investors.
So, in short, deciding on where to list depends on the stock markets’ characteristics, including liquidity, the investor base, and the company’s own preferences.
The Hong Kong market has been well known for attracting Chinese issuers and I believe that will continue. Not just because some of those sectors in mainland China can’t list in mainland China – for example, China liquor companies are listing in Hong Kong. We still enjoy the advantages that some issuers would prefer, like no foreign exchange controls. That is also something they might be looking for.
But having said that, Hong Kong also has a position to play in attracting more non-Chinese corporates to be listed here. Particularly those from other Asian countries.
Not necessarily this year or the next, but in three years from now, we’ll hopefully see a small Asian board on the Hong Kong exchange.
Zili Guo, UBS: I’ll leave the regulation part and listing requirement part to the experts.
For Chinese issuers considering listing venues, the viable options include A-shares, Hong Kong, and US ADRs, and for A-share listed companies, they may choose GDRs rather than an A-share placement or share placement.
Valuations vary on different exchanges but, my observation is that valuation is not now the primary consideration for issuers coming to the market. Given recent market volatility, I think certainty of funding, or certainty of listing, becomes the most important consideration.
Hong Kong still has the advantage over ADRs.
For ADRs, there are always three challenges to overcome: China regulation, US regulation, and investor demand. The first two factors seem to have reached an agreement, but investor demand has become an issue.
In A-shares, it may take longer for regulators to review the application but liquidity in the market has deepened. It is also relatively immune to global volatility.
It seems more issuers are considering a dual-listing structure, i.e. list in Hong Kong but at the same time maintain the flexibility to list A-shares in the future. That’s becoming a more popular trend for potential issuers.
Sheng Chen, Baker McKenzie: From a lawyer’s perspective, the two most important considerations when recommending a listing venue are valuation and the listing process and requirements.
Valuations are generally higher in A-shares, compared to the US and Hong Kong markets. But there is a trade-off: It takes a longer time for the China Securities Regulatory Commission to approve an issuer’s listing application than in Hong Kong and in the US. So, when an issuer is choosing which venue to list, valuation will be the first consideration, and time will be the second. For example, how long will the application take? What difficulties will it face? How much compliance work and other due diligence work does the issuer and other professionals have to do? All of these are important considerations.
Another influencing factor will be the industry in which the issuer is operating. If the issuer is in a traditional industry, or it’s a blue-chip, large-sized company, then I think A-shares might be a more suitable listing venue. But if the issuer is in the new energy sector, or if it is in the value chain of the EV industry, for example, then I think Hong Kong or US markets will be a better option.
IFR Asia: Zili mentioned some very good points about certainty of funding in this market. That’s what the issuers want.
Does the Hong Kong IPO market still offer certainty to issuers? I ask that because we have been very quiet this year and most IPOs are trading below their launch prices.
What are the catalysts that could turn this situation round?
Samuel, what do you think of the Hong Kong IPOs out there?
Samuel Chan, BLS Capital: Right now, the key issue is the lack of liquidity. We have seen a good list of cornerstone investors coming into sizeable deals, but in terms of retail participation, and in terms of aftermarket secondary markets, the level of liquidity isn’t sufficient to drive prices higher or even sustain them at current levels.
From our perspective, we hope to see a lot more diversified sectors coming to Hong Kong – like advanced manufacturing, or new energy.
But to see that happen we first need a solid market, a sign that investor confidence is coming back to the market.
Without investor confidence, without a good secondary market, then I think it’s hard to see listing volumes pick up going forward.
Sheng Chen, Baker McKenzie: Just as Zili said earlier, we need to see two or three well-performing IPOs from promising sectors, supported by real investor demand to restore market confidence. And then I think we will see the market gradually come back to life.
Zili Guo, UBS: Besides quality issue, scarcity and reasonable pricing, I think - most importantly - we need to see new money coming into the system.
By that I mean, new money coming into the market once we see the easing cycle start again, and once the economic outlook and confidence has improved. There is also talk about new money flowing in from different regions, such as the Middle East.
In addition, if there’s anything that can help the secondary market, then that would be positive. I think, maybe, a broader Stock Connect scheme might help – especially for new issuers.
Barry Chan, CICC: I do agree with Zili about new money. At the end of the day, it’s a game of demand and supply. Unfortunately, we are facing a significant decrease in terms of suppliers of money.
As Zili said, there’s no more cheap money. That already represents a significant decrease.
And going back to the US banking situation, in times of crisis money tends to be parked in safe investments.
In mainland China, even though people were spending over the long holidays – Chinese New Year, Labour Day, Golden Weekend – we didn’t see a significant increase in spending on the most significant assets, like property. Consumers are saving money in mainland China.
And signals – when the government has called for “efforts to boost the real economy, expand domestic demand and stabilize external demand to promote economic recovery,” that suggests to me that we can’t expect any support from outside China. The aim is to stabilise external demand, not enhance it.
But it does hold out the hope that we can enhance demand domestically. If that turns out to be effective, that turns out to boost confidence, then I think some Chinese investors will be able to do something.
It all goes back to the question of why you invest. It’s because of your expected return, the quality of the issuer, the expected growth of the company.
As bankers, we are searching for higher-quality issuers from which investors can choose.
So, when is it a good time to invest? I think it’s a good time to find some very high-quality or investable investment right now.
IFR Asia: It looks like we must rely more on internal demand instead of external demand to save the economy and the market.
How effective do you think ties with the Middle East could have on Hong Kong’s capital markets? How will that bring new capital to the market, and how could that help tempt some big issuers to list in Hong Kong?
Barry Chan, CICC: I’ll take this question, because I’ve been travelling to the Middle East – or, as I prefer to call it, ‘West Asia’.
I started to travel to West Asia last year, which was very hard at the time because of all the quarantine requirements. Since that first trip, I’ve been another three or four times.
And the reason for that is, as Zili said, we tried to find a source of new money. It may just be a reallocation of money from the old market to the new market, but I think we can attract new money, new investments, and I think that would be significant.
And there’s also a need. They need to transform from traditional oil to new energy and China is top in the world in terms of the new energy technology, such as EV, solar, and batteries.
In the past two decades, China has been successful in building-up a new energy technology ecosystem, something that is lacking in West Asia’s economy.
They would love to see some of the clients we have, like Huawei, set up a factory there. They certainly would love to see that because it’s not just one factory. We are bringing an ecosystem to their country.
In return, West Asia is an attractive country for business as it is in the middle of the world – five or six hours from Asia, and six hours to Europe, at most.
They have ports, there’s an abundance of land and there is little tax. They also have a supply of economic labour from neighbouring countries. It ticks all the boxes for Chinese companies wanting to invest or to set up a new factory.
Zili Guo, UBS: I agree with Barry, and it seems everyone’s going to the Middle East – or West Asia. In fact, I’ve just returned from a trip.
I look at it in two dimensions: Middle East capital and assets, and China Hong Kong capital and assets.
Middle East capital investing in China Hong Kong assets, is not new. Middle East capital is quite familiar with blue-chip China or Hong Kong assets listed in Hong Kong, or in A-shares through the QFII channel.
China Hong Kong capital, however, is less familiar with Middle East assets. To promote this flow, we need a stronger endorsement from both governments, and we need more investor education.
I think this capital connection will take place primarily at the corporate level. For example, we have seen Aramco invest in a JV with Baosteel and PIF. I think investment will begin at this type of strategic level.
For sovereign wealth funds, which take an institutional investor approach, it takes time for them to increase their allocations to the Hong Kong China assets. One foreign investor recently told me that, historically, their allocation to China Hong Kong assets was around 9%, but that they expect this proportion to increase to somewhere around 20%.
It’s a massive opportunity for both sides.
IFR Asia: What are they looking to invest in? You said they’re trying to boost their foundation investments. They’re investing in Hong Kong China. But what assets are they looking at?
Zili Guo, UBS: What mostly interests them is ‘new energy.’ The Middle East is on a mission – in Saudi, they call it ‘Saudi Vision 2030’, where its priority is ‘de-oilisation’. Then they’ll look for new energy, or maybe most importantly, the replacement of older energy.
They are also particularly interested in the sectors and industries that can help them upgrade or diversify their domestic economy.
IFR Asia: Is technology one of them?
Zili Guo, UBS: Technology, yes. But only the replicable ones that apply to their country.
IFR Asia: Yes. We are seeing the Hong Kong Exchange make it easier for commodity-focused companies to list in Hong Kong – and China has got all the rules ready.
We’ve also seen tech giants announce several spin-off brands. Are we expecting a strong comeback of tech IPOs in the markets? Or will they wait on the sidelines because of the market conditions?
Zili Guo, UBS: Again, my rule of three successful IPOs still applies for this question.
I’m cautiously optimistic. I think tech companies, in one way or another, will rebound. Luckily, we have seen a new trend for the tech giants to spin off their units and start to do separate listings. I think if anything can work, then it’s these ones.
Whether the current market can support their expected valuations, however, or whether the aftermarket performance supports later IPOs, are questions to be answered.
HKEX is making efforts to attract tech companies with the introduction of Chapter 18C [listing rules for specialist technology companies].
Chapter 18C will work in the right market window, but for now, the investor priority is to focus on companies with high visibility, profitability, cashflow. You could call it a ‘flight to safety.’
I think Chapter 18C companies would normally not have sufficient high-visibility or profitability. It needs the right market for it to work.
IFR Asia: Samuel, do investors find value in technology stocks now? Is it the right time for bottom fishing?
Samuel Chan, BLS Capital: The major tech giants are trading at multiples that are a lot lower than in the previous past few years. They’re becoming a value investing stock.
It’s hard for smaller peers to have a good comps versus the tech giants – and we love to pay less for growth – so I would like to see more spin-offs from the tech giants. I’d like to see firms like Alibaba spin off into individual entities to unlock different values from the holding company. Smaller companies would then have better valuation comps.
IFR Asia: There’s a lot of discussion going around about GDRs. China has recently released new rules on GDRs – some requirements on size, use of proceeds, market cap. If you want to do a GDR, you now must go through the same filing process as for A-share private placements.
The new rules have all but eliminated the advantage of GDRs over A-share follow-ons.
Are we going to see a slowdown of GDR issuance? How will the landscape change?
Sheng Chen, Baker McKenzie: The new CSRC rules on GDR issues introduced a couple of major changes. First, issuers will now be required to appoint a sponsor to make registration of the A-shares (the underlying securities of the GDR) in addition to the filings and the approval to be issued by the CSRC which are required under the old rules.
So, procedure-wise, the sponsor and the issuer need to prepare the A-share registration documents, which imposes additional work on both issuers and investment banks.
Second, there’s also a new requirement for an 18-month period between the board resolution of a GDR offering and the receipt of the proceeds from a previous financing transaction. This brings it in line with the A-share follow-on offering regime.
Third, in addition to preparing the English language prospectus for submitting to the foreign stock exchange (be it the London Stock Exchange or the Swiss Stock Exchange), issuers now need to prepare a Chinese prospectus, such that it is in line with the A-share follow-on offering prospectus. This places significantly more work on issuers and investment banks. In particular, one of the key disclosure requirements is to detail the plan for use of proceeds in the Chinese prospectus. With the new set of rules, the issuer must think through and disclose the feasibility of the use of proceeds, the quantitative methods as to how the funds will be allocated, and how the issuer will monitor these allocations. All this information needs to be disclosed in the Chinese prospectus.
In short, although the new rules impose additional documentation and procedure requirements, the new rules enable GDR offerings to be more aligned with the new A-share registration reforms, which provides practitioners with greater clarity about this new product. We are still waiting for the authorities to clarify the rules around some of the new requirements, so stay tuned.
IFR Asia: Zili, am I right to say that under the new rules, the only advantage left for issuing GDRs is a minimum 10% discount, versus 20% discount on A-share follow-ons?
Zili Guo, UBS: I tend to agree, but not fully. I think for the new rules, it means more work for everyone. At the same time, it is a narrower filter for future GDR listings.
I think investors, issuers, and even bankers need more time to adapt to the new rules. Stock exchanges are going to issue practical guidelines soon but, in the meantime, the new rules will slow down the process.
The new rules have raised the bar for all stakeholders but for those blue chips with justifiable or reasonable overseas plans, with a real international investor base, GDRs can still work.
Barry Chan, CICC: You must ask why the regulators made the changes.
The regulators really want Chinese companies to get some international, non-Chinese investors, in London, Frankfurt, and Switzerland. And I also suppose that, as Zili or Chen said, these companies need foreign currency to invest outside China.
But some smart A-share investors in China thought: “Why can’t I go to Europe and buy this company’s GDRs and, six months later, convert it into A-shares and get the profit from the dispersal in Shanghai?” That’s the reality.
In the near term, we’ll see activity in GDRs decrease for all the reasons we’ve heard, but I do believe, in the longer term, the changes will help enhance the quality of those issues. The policy makers want to achieve a long-term, sustainable, market for international investors to invest in Chinese stock.
This is for the long-term. I’m still optimistic. I still believe that this programme will continue, but in a more regulated or directed way, so that the quality and sustainability can be assured.
IFR Asia: What else can Chinese companies think about, in terms of listing in foreign markets, then? Are US IPOs still an option for them?
Sheng Chen, Baker McKenzie: Yes, the US market is still a viable option for PRC issuers.
Some domestic small-cap or mid-cap start-ups may be finding it difficult to meet the listing requirements of the Star Board or the Hong Kong Stock Market. In that case, they may be better off with the looser listing requirements on Nasdaq or the NYSE.
More small-cap or mid-cap PRC issuers will be listing in the US, and the market figures already demonstrate it. There are 20 or 30 PRC issuer applications filed already, and I also see two or three US IPO issuers filing with the CSRC.
IFR Asia: Samuel, are you interested in Chinese companies listing in the US?
Samuel Chan, BLS Capital: Right now, it’s hard to see any major companies listing on the ADR side due to the cybersecurity issues. Those with existing ADRs will be fine, but I think an ADR listing will more likely be available for small and mid-cap companies.
IFR Asia: Zili, are any clients still looking at a US IPO? How do they prepare?
Zili Guo, UBS: They are still looking at a US listing, but it’s not a must-have. It’s an option, but not the only one.
As I said, the issuer needs to pass through three doors on the way to get a successful US listing. The Chinese and US regulators seem to have reached an agreement, but it’s only technical. The geopolitical tension is still there and that’s the cause of huge investor concern.
And, if we look at the aftermarket performance of recent Chinese ADRs, the big takeaway is that investors don’t have confidence in this product.
On the other hand, A-shares, the Star board, ChiNext, are providing alternatives for issuers.
A US listing is still an option, but less of a priority.
Barry Chan, CICC: It’s always good for issuers to have another option, and the US market is not closed – in fact, it’s officially open for Chinese investors. But, at the end of the day, whether an issuer considers going to the US depends on valuation, liquidity, and investor appetite.
Judging by Zili’s numbers, we can see the US, or international, investor is asking for a high-risk premium for stock trading on the Hong Kong exchange.
But A-shares still have decent valuations. Bear in mind that Chinese investors dominate this market, which means they don’t require that kind of risk premium.
So, how do we solve the challenge of international investor requiring higher-risk premiums? Does it mean we target more mainland Chinese money? Possibly. Or do we just let issuers choose where to raise money?
Now, it’s a buyers’ market.
How can we attract more of this mainland money to the Hong Kong market? This could be the key, the beginning, of having more flexibility, new rules, in Stock Connect. We can work with policy makers to make the Hong Kong market more attractive.
Even though we already have some particularly good fundamentals – we have a free foreign exchange system, we have the legal system, we have the combination of the two worlds. But that isn’t enough. We need something else.
IFR Asia: Zili, you mentioned STAR BOARD and ChiNext. There has been phenomenal development in these two markets in recent years. But now, there is a registration-based system in all stock exchanges, and rules AROUND PRICE DISCOVERY HAVE CHANGED.
Are all these reforms going to attract more international capital to A-share markets?
Zili Guo, UBS: It’s a simple yes. More international investors are exploring exposure to A-shares, or they have already started to increase or apply for new Qualified Foreign Institutional Investor quotas.
International investors participate in A-shares mainly through QFII quotas or the Stock Connect and both routes have been quite successful. We have seen a lot of long-term international investors increase their quota on the QFII.
The new rules just provide more opportunity for participation, but there are a couple of things that we need to improve.
We’ve already seen higher participation. For example, in the CATL Rmb45bn (US$6.2bn) private placement we did last year with CICC, over 40% went to international investors through QFII.
We have different rules in China, and sometimes the international investors may not be familiar with the A-share rules, but they’re looking and they’re starting to adapt.
There are a few things that we need to improve to encourage greater participation from international investors. One is the allocation mechanism. In the international market, it’s common practice for underwriters to have discretion in allocating shares to investors. But in A-shares, there is a price exclusion system and QFII is not an important component of the group to be consulted with.
The other thing is allocations. A-shares normally run a lottery system and international investors are put off making a lot of effort analysing the fundamentals of a company and putting in for a large ticket if they end up with a very small allocation. Historically, QFII participation has been as low as 1%, 2%, 3% of the issue.
This is a bottleneck that stops international investors from further participating in the primary market for A-shares.
Barry Chan, CICC: Officially – and personally – I like the changes to the system, including the registry system. It means the market is going to be better, more adaptive to the market, and more able to mitigate risk.
We just take it for granted that we have a good, safe, system. But there are always surprises. Who would have thought last year that banks in Switzerland can collapse, banks in the US can collapse. Wasn’t it the best regulatory framework in the world?
China has been making changes bit by bit to perfect the financial system, and this kind of registration process is contributing to it.
What also gives me optimism is that GDP per capita in China is rising. We don’t need to reach the same levels in the US but doubling it in China (to US$24,000) is achievable.
So, in the medium-term, there are still a lot of opportunities. We still have room to grow.
Systematic risk has been well managed and a focus on enhancing domestic consumption will be an engine for investment opportunities.
I would also say that the gradual internationalisation of the renminbi – I’m not saying that it will replace the US dollar – will also support the attraction of Chinese assets to international investors.
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