Stress and despair: New year, old wounds for Hong Kong bankers, IPO market weakening and windfalls missing out on investors

There have been some significant layoffs at Wall Street investment banks. Goldman Sachs' global headcount fell 7 percent in 2023, while Morgan Stanley and Bank of America reported declines of 2 to 3 percent. Those who managed to keep their jobs have suffered Reduction in total compensation by 40 to 50 percent.

It's a daunting task for Bonnie Chan Yiting, who was promoted to CEO of exchange operator Hong Kong Exchanges and Clearing (HKEX) on March 1. The 54-year-old manager is a trained lawyer and was the first to witness the break-in. As IPO proceeds more than halved to $5.9 billion last year compared to $51.2 billion in 2020.

Last year, 27 stocks, or 42 percent of IPOs, ended the year below their offering prices, according to Bloomberg data. In 2022, 42 stocks or 61 percent of debutants caused losses to investors, up from 58 stocks or 67 percent in 2020.

Chan said she was unaware of the challenges.

“These are turbulent times for global financial markets, and Hong Kong is no exception,” she said in an internal memo on March 1 after succeeding Nicolas Aguzin as CEO. “Despite the macroeconomic environment, our business has not slowed down. We did not allow the noise of short-term challenges to distract us from the long-term positioning of our company.”

Bonnie Chan took over as CEO of HKEX on March 1, succeeding Nicolas Aguzin. Photo: May Tse

An unprecedented four-year, trillion-dollar selloff sparked by heightened geopolitical tensions between the U.S. and China has pushed Hong Kong's valuation to the lowest place among major global stock markets. That has become a scourge for IPO candidates, who traditionally prefer exchanges that fetch the highest price for their shares.

Members of the Hang Seng Index now command valuations averaging about 8.6 times their current year earnings and 7.8 times their 2025 earnings, according to Bloomberg data. That's a far cry from the roughly 13 times before a full-blown Covid-19 pandemic and 14 times in 2017, when benchmarks tracking Chinese stocks at home and abroad posted their best returns since 2009.

Cainiao, Midea, SF and Movoi are among the most anticipated Hong Kong IPOs in 2024

“Companies that want to go public need to get better valuations and that is not the case yet,” said Federico Bazzoni, CEO of Vantage Capital Markets, who has advised two clients to postpone their plans. “There are no clear signs that the market is moving up, that the trend will be positive over the next two or three quarters.”

Last year, Bazzoni also advised two of his clients to postpone their IPO plans. Market weakness remains a significant obstacle for ambitious issuers, even as the city continues to attract regional companies, particularly those from Southeast Asia.

Federico Bazzoni, CEO of Vantage Capital Markets in Hong Kong. Photo: Handout

“You could call it a bit of a disappointment,” he said. “From our point of view, it would be better to wait another year to get a better result.”

That sums up the situation with big offers from industry leaders. It has been nearly five months since Midea Group, the world's largest home appliance maker based in the southern province of Guangdong, announced its plan to list on the Hong Kong stock exchange. There has been no progress on JD.com's plan to spin off its industrial and real estate units and take them public.

Eleven months have also passed since Alibaba Group Holding, the owner of this newspaper, announced an internal corporate restructuring that would involve spinning off and listing some of its units. These include the cloud computing and Cainiao smart logistics companies.

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Hong Kong Monetary Authority chief Eddie Yue on the future of the city's economy amid higher interest rates

Hong Kong Monetary Authority chief Eddie Yue on the future of the city's economy amid higher interest rates

In Alibaba's post-earnings conference call last month, Chief Executive Joe Tsai said the market was “simply not in a state where we believe we can truly reflect the true intrinsic value of Cainiao or its supermarket chain Freshippo,” both of which are targeting initial public offerings of the company are planned to be revised.

While facilitating and managing existing listings provides a stable and regular stream of fees, the company remains a relatively small part of the HKEX group. According to financial reports, listing fees accounted for just 10 to 12 percent of annual revenue over the past decade.

Half of the group's revenue came from fees from new listings of shares on the Main Board and the GEM market, as well as from equity bull-bear contracts and derivative warrants.

Hong Kong is also working to attract Middle Eastern companies with secondary listings in the city. By adding Saudi Arabia's Tadawul Exchange to the list of recognized exchanges, HKEX has also paved the way for state oil giant Saudi Aramco to establish a base in the city.

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Paul Chan is wooing Middle Eastern companies to visit Hong Kong in 2023 to explore listing opportunities

Paul Chan is wooing Middle Eastern companies to visit Hong Kong in 2023 to explore listing opportunities

Investment bankers say IPO candidates are postponing their roadshows until overall market sentiment improves. Some noted that this could take months, as the geopolitical and technical rivalries between the US and China are not going away anytime soon.

This leaves the industry to fight for smaller deals. For example, Chinese restaurant chains Xiaocaiyuan International and Mixue, which operate 36,000 bubble tea shops, won't stoke investor fervor the way Tencent Holdings and Alibaba or even the ill-fated Ant Group did in the past.

Singapore's DBS Group and Wall Street banks such as Citigroup said the attention and craving for blockbuster offerings could lead to an underestimation of the steady stream of profitable but smaller companies driving the IPO market.

“Although much of the discussion focuses on large IPOs, there continue to be a significant number of mid-sized companies seeking IPOs,” said Lindsay Chu, head of capital markets for Hong Kong and China at DBS Group, Singapore's largest lender. “⁠Chinese mid-cap companies will continue to view Hong Kong as an attractive IPO location.”

Left to right: Kenneth Chow, co-head of Asia equity capital markets at Citigroup; Melody Ngan, head of Asia Pacific equity markets at Deutsche Bank, and Lindsay Chu, head of capital markets for Hong Kong and China at DBS Group. Photo: Handout

Based on last year's 68 IPOs, the median size was $45 million, while the pre-trading market cap was about $510 million, according to Chu. This year, DBS expects both metrics to improve given the number of larger IPOs it is considering.

This view is shared by Kenneth Chow, co-head of Asia equity capital markets at Citigroup. He believes there is a strong pipeline of mid-sized Chinese companies looking to expand their businesses globally.

“Many of these companies were born global,” he said. “Given the regional and global nature of their operations, it is advantageous to have a diversified global investor base and an offshore listing. Hong Kong is well placed to benefit if these companies want to go public.”

Melody Ngan, co-head of Asia Pacific equity capital markets at Deutsche Bank, said the start of 2024 will continue to be difficult for listing candidates in mainland China and Hong Kong.

“The Hong Kong Stock Exchange has always seen a steady flow of mid-sized Chinese companies going public, but the size of IPOs appears to be smaller than in previous years,” she said. Still, “companies with positive earnings and strong balance sheets will continue to resonate well with investors.”

For example, the Chinese biotech company Wuxi

Hong Kong bankers earn 46% more than their counterparts in Singapore

After completing a small IPO transaction this year, a banker at a Chinese investment bank said it was a relief. In the past, dealmakers have typically measured their success by winning a mandate for blockbuster deals. Huge IPOs, few and far between now, are the ones that will keep many in jobs or stave off the downturn, he added.

According to Carol Cheung, director of financial services at Robert Walters, a human resources and payroll consulting firm, the landscape in the industry has changed significantly in the last quarter, with overall hiring declining across the investment banking sector.

“The market has been conservative and cautious in hiring middle management employees and shifted towards hiring lower management employees,” she said in a report.

Bankers who spoke to the Post said they expected a recovery in the second half of the year. Much will depend on the timing of the Federal Reserve's expected rate cuts, a move that would give Hong Kong and Beijing additional leeway to stimulate the economy.

To revive the city's sluggish financial market, Hong Kong also wants to attract companies from mainland China, the Middle East and Southeast Asia. The government actively cooperated with mainland regulators to expedite the approval process for Hong Kong-listed companies. Finance Minister Paul Chan Mo-po said this at a forum in January.

According to Bazzoni of Vantage Capital Markets, Hong Kong remains the appropriate market for companies seeking fresh capital to expand in the region. “We need some strong signals. There are very few signs at the moment.”

Additional reporting by Li Jiaxing and Enoch Yiu