China’s regulatory crackdown drags down Hong Kong’s IPO channels

© Reuters. File photo: An overview of the skyline architecture of Hong Kong, China, July 13, 2021. REUTERS/Tyrone Siu

Scott Murdoch

HONG KONG (Reuters)-Dealers said that as Chinese companies have lowered their valuation expectations due to severe regulatory crackdowns on the mainland, Hong Kong’s lively IPO channels may gradually decrease in the second half of 2021.

They added that as China’s attacks on fast-growing private companies have created an uncertain environment, investors will also choose which deals to buy.

China’s months-long regulatory crackdown has involved companies and companies in the US$120 billion tutoring industry. Alibaba (NYSE:), Ant Group and ride-hailing giant Didi.

A Hong Kong stock capital market banker said: “Until the regulation becomes clearer, education will definitely be suspended. If you look at the upcoming transactions… we will see that the overall valuation may not be what it used to be. high.” .

“This may have nothing to do with the industry, but more driven by the market’s sentiment towards Chinese companies,” said a banker from a leading Chinese investment bank, who declined to be named because he was not authorized to speak to the media.

The pessimistic outlook marks a reversal of the outlook for Hong Kong. After Beijing strengthened its review of overseas listings of Hong Kong companies this month, analysts had expected Hong Kong to see more financing from Chinese companies.

Hong Kong is the world’s third most popular listing location and the main driver of revenue and fee income for the world’s largest investment bank. The public float of Chinese companies accounts for the majority of Hong Kong’s initial public offerings.

Refinitiv data shows that in the first half of 2021, Hong Kong raised more than US$18 billion through IPOs, compared with US$4.6 billion when the COVID-19 pandemic hit the city a year ago.

Dealers said that according to Refinitiv data, IPOs and secondary listings in the second half of 2020 raised a record $30.2 billion, a level that is unlikely to match China’s ongoing regulatory changes this year.

‘Most transactions are shelved’

The largest transaction in Hong Kong in the second half of the year was the potential US$7 billion secondary listing of China Tourism Group Duty Free.

Some capital market participants have not given up the hope of continuing the bull market. Hong Kong Mayer Brown partner Jason Elder said: “This is still positive and constructive. We have not seen our pipeline interrupted.”

However, many analysts and bankers believe that investors will stay away while waiting for the impact of China’s regulatory changes to emerge.

Last week, Beijing put forward strict requirements on the extracurricular tutoring industry, prohibiting companies from teaching core school subjects, raising funds, and applying for IPO profits, and said it would not issue new licenses.

Regarding the overseas listing of domestic companies, China recently stated that companies with more than 1 million user data need to conduct security reviews first.

Investors and bankers are now trying to find clues as to which industry they might target next. Some pointed out which industries allowed entrepreneurs to get rich quickly, while others pointed to loose labor laws.

“Most transactions will be shelved until the market stabilizes,” said a banker from a European institution who asked not to be named.

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