China recently approved a proposal to refurbish its initial public offering (IPO) system. According to Reuters, which quoted official news agency Xinhua, China’s top-legislature – National People’s Congress – approved the State Council’s proposal to shift to a more U.S. style IPO registration system from the current one.
Chinese regulators intend to use the new system to re-build confidence among investors in the wake of a slowing market, weak export data and the yuan devaluation. According to a CNNMoney survey, China’s growth projection is pegged at a lackluster 6.5% for 2016.
Nevertheless, the transition will help in eradicating corruption that has been responsible in distorting the IPO market. Under the proposed registration system, the IPOs will be decided by market factors. This is expected to help companies raise money more efficiently, simultaneously lowering regulator involvement in the market.
According to Xinhua, the State Council expects the registration system to be in place by as early as Mar 2016. Following the recent approval, the State Council will now mull over the specific details of the registration system. The State Council has a time limit of two years (from Mar 2016) to implement the IPO system.
Although the new IPO reforms will improve transparency, some market observers believe that the revamped U.S. style system can result in a flood of IPOs that will again drag down stocks, similar to what happened in the summer of 2015.
The China Securities Regulatory Commission (CSRC) was forced to halt IPOs in mid-June in order to stabilize the market, which lost as much as 40% over a few weeks. China re-opened the IPO market in November and since then at least 10 new companies have listed themselves in the market.
Hong Kong Overtakes New York
Meanwhile, Hong Kong recently became the world’s biggest IPO market in terms of the amount of funds raised. According to Thomson Reuters, companies raised $25 billion via IPOs in Hong Kong so far this year, higher than $19.4 billion raised in New York.
Hong Kong Stock Exchange saw a number of high value transactions in 2015. Guotai Junan Securities Co Ltd ($4.8 billion), China Huarong Asset Management Co Ltd ($2.5 billion) and China Railway Signal & Communication Corporation (over $1.5 billion) IPOs were the forerunners in terms of the amount of capital raised.
On the other hand, New York’s IPO proceeds have declined 73% this year as compared to $71.4 billion in 2014. Alibaba Group Holdings’ BABA massive $25 billion deal was significantly responsible for the substantial upside in 2014.
According to Renaissance Capital, the largest U.S. IPO so far in2015 was that of First Data Corporation FDC, which raised $2.56 billion in capital. Tallgrass Energy GP LP TEGP took the second spot with IPO proceeds of $1.20 billion.
Notably, only five Chinese companies listed themselves in the U.S. in 2015. E-commerce and logistics services provider Baozun Inc. BZUN was the largest IPO, which raised almost $110 million in IPO proceeds.
Deal Pipeline Strong for 2016
According to Ernst & Young, the outlook for U.S. exchanges appears good, as they are expected to attract a significant percentage of global IPOs in 2016. The IPO pipeline continues to build as companies aim at taking advantage of confidential filing under the JOBS Act provisions. Moreover, expanding real GDP and strong consumer spending will provide confidence to companies waiting to get listed.
On the other hand, the pipeline for new listings remains exceptionally strong in Mainland China (approximately 600 companies) and Hong Kong (almost 60 companies), despite macro-economic headwinds and declining exports. However, capital market reforms such as the Shenzhen-Hong Kong Stock Connect and the newly approved system will reinstate investor confidence in our view.
Zacks Rank
Alibaba, First Data and Tallgrass Energy carry a Zacks Rank #3 (Hold), while Baozun has a Zacks Rank #4 (Sell).
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