China continues to dominate the rankings when it comes to the top locations for IPOs and tops the table for funds raised in Asia – and the world. However, recent rule changes mean that some companies – particularly those in the technology sector – are considering alternative plans. Meanwhile, other locations in Asia have been making moves to make their markets more attractive to technology companies and start-ups to raise capital. When it comes to Asia’s regional champions of the future, there are a number of IPO locations for them to choose from, and destinations in South-East Asia are emerging as the ones to watch.
While many jurisdictions are introducing reforms and doing their best to attract companies to list on their bourses, China continues to lead the global IPO market. According to PwC’s Global IPO Watch, in the third quarter of 2023, China took the lion’s share of IPO proceeds, raising US$11.7bn, followed by the United States in second place with US$9.3bn. Most of the activity, PwC notes, came from China’s Star Market, which is focused on home-grown technology companies.
Meanwhile, the technology sector dominated IPOs at a global level and there was a particular interest in the renewable energy sector, according to PwC. At a country level, 70% of South Korea’s IPOs were for semiconductor and technology companies, and the US and Japan were particularly focused on artificial intelligence companies.
With much buzz around technology, stock exchanges have been doing their utmost to attract the hot companies of tomorrow to list on their exchanges. China launched its Star Market in 2019 in a bid to create a bourse that was specifically focused on technology companies. It has been described as China’s answer to the Nasdaq in the US and has accounted for much of the recent IPO activity in China. However, recent rule changes mean that the enthusiasm for Chinese tech listings is running aground and many companies are having to rethink their IPO plans.
Chinese technology companies have been subject to a number of rule changes in recent years and Treasury Today Asia has previously reported on how a crackdown impacted a number of technology companies’ ability to raise funds overseas.
More recently, rule changes to the Star Market mean that growing technology companies may also find it difficult to raise money at home. In October 2023, the Financial Times reported that 126 companies had cancelled or suspended their plans to list in 2023 because of a change in requirements to list. This number of companies was higher than the number of firms that had withdrawn their applications in the entire time the Star Market had been active. The disruption had occurred following new standards from the China Securities Regulatory Commission (CSRC) that means that companies now have a higher bar to reach in terms of their profitability before they are able to list. Previously, such companies didn’t need to be profitable to list on the Star Market, which is officially known as the Shanghai Stock Exchange Science and Technology Innovation Board.
Also, the process had become incredibly bureaucratic with the application form to list on the bourse being more than 100 pages long. Many start-ups, which are not able to demonstrate their profitability in the same way as established companies, were put-off by the lengthy questioning about their business model and chose not to list on the Star Market.
The state’s intervention in the market is driven by a desire to establish China’s major companies of the future, which are aligned with the state’s goals for the future economy. The intention is to identify companies that have the potential to be global leaders, and only list the companies that will be a guaranteed success, comments Andrew Collier, Managing Director at Orient Capital Research. Collier explains that the Star Market’s target industries are mostly hardware rather than software, and less focused on consumption and companies that provide video games or food delivery, for example. One issue is that the bureaucratic decision-making process is driven in part by a fear of failure, comments Collier, who is also author of China’s Technology War: Why Beijing Took Down Its Tech Giants.
As a result, a number of companies have shied away from listing. Being listed on the Star Market would give companies a certain kudos, and without that listing it may be seen they are not favoured by the government, thus making it difficult to raise funds elsewhere. The recent change in policy has been criticised by many observers and has caused uncertainty in the sector. “Letting regulators decide which high-tech companies should go public is like asking an eight-year-old child to choose the best moon-landing technology,” Chen Zhiwu, a finance professor at the University of Hong Kong, was quoted by the FT as saying.
Collier points out that all jurisdictions regulate their markets and there are always rules and regulations. “There is nothing wrong with making decisions about how to control the markets. It’s just that if the state is picking winners and losers, bureaucrats are not known for doing this well,” says Collier.
Changes in Hong Kong
Meanwhile, in Hong Kong there have been changes that are encouraging technology companies to list, which coincides with a number of other reforms that are set to make Hong Kong a more attractive IPO destination.
One rule change that is expected to make an impact is Chapter 18C, which applies to specialist technology companies and went into effect in March 2023. According to Sidley, a law firm, the changes are intended to make it easier for tech companies to raise funds at the earlier stages of the company’s growth. The bar has been lowered for such companies and the threshold for revenue has been reduced, which overcomes a typical challenge that start-up and scale-up companies face in the early stages of fundraising when it is difficult to generate revenue and profit. Such challenges usually mean early companies are unable to go public, but the rule changes aim to address that and encourage high-growth companies to list.
Virginia Lee, a partner at law firm Clifford Chance in Hong Kong, explains that the specialist technology companies are in five industries: next-generation information technology, advanced hardware, advanced materials, new energy and environmental protection, and new food and agriculture technologies. This covers companies that are engaged in cloud-based services and artificial intelligence, robotics and automation, semiconductors, advanced communication technology, and electric and autonomous vehicles, for example. “We believe this new Chapter 18C, together with the many recent initiatives of the HKSE [Hong Kong Stock Exchange], will increase the competitiveness and attractiveness of the Hong Kong market to regional and international issuers and investors and demonstrates the continuing efforts of the HKSE to grow market activities and liquidity,” Lee writes.
In a recent press briefing in Hong Kong, experts at PwC were also positive about the impact that Chapter 18C would have on connecting such specialist companies with international funds. “Specialist technology companies in fields such as semiconductors and artificial intelligence (AI) have great potential and have attracted attention from the market,” says Benson Wong, PwC Hong Kong Entrepreneur Group Leader. He adds that he expects to see three to five specialist technology companies to list in Hong Kong through Chapter 18C in 2024.
“The influx of Chinese mainland companies establishing or expanding their presence in Hong Kong, coupled with the increasing demand from international funds to allocate into RMB assets, means that there will be greater interconnection between the Hong Kong and Chinese mainland markets,” says Benson Wong.
Hong Kong IPO outlook
The outlook for the wider IPO market in Hong Kong is also looking more positive. In 2023, the market was muted with the number of IPOs in Hong Kong seeing a decline. The total fundraising for the year was HK$46.3bn, which was a 56% decrease on the year before. PwC puts this decline down to a number of factors, including the upheaval caused by global and political uncertainties. PwC expects the market to pick up and reach HK$100bn in 2024, and capital for Europe, the US and the Middle East is expected to return to Asia once interest rates start to come down.
The outlook for Hong Kong is also positive because the market has been making improvements to its offering and updating its trading technology. PwC sees potential with the Stock Connect mechanism, which links the Hong Kong market with mainland China. Through Stock Connect, investors can trade and settle shares listed on the other market through the exchange and clearing houses in their home market. With greater use of this mechanism, the experts at PwC expect this will strengthen the investor base in the Hong Kong and Chinese mainland markets and enhance liquidity and valuations. “The further expansion of Stock Connect will help promote Hong Kong as a centre for RMB asset risk management and solidify its position as a global offshore RMB business hub,” Benson Wong comments.
There have been other moves in Hong Kong to improve the environment for listing, with reforms to the Growth Enterprise Market (GEM) as well as the introduction of the FINI platform.
The GEM focuses on small and mid-sized issuers and has a lower bar for listing making it easier than listing on the main board of the Stock Exchange of Hong Kong (HKEX) for smaller companies to go public. There have been some recent reforms to the GEM listing to encourage new listings. Denise Jong, Anthony Woo and Vivian Ji, all lawyers at Reed Smith, explain that in 2022 there were no new GEM-listed issuers in Hong Kong and since 2019 the numbers have been in steep decline, hence why the exchange took action to encourage small companies to list. Now there is a new eligibility test, which makes it easier for companies to be eligible, and they are no longer subject to quarterly reporting. Such moves will enhance the attractiveness of Hong Kong Stock Exchange says Eddie Wong at PwC. “Small and medium-sized enterprises (SMEs) are an important driving force in promoting Hong Kong’s economic prosperity. This initiative will help SMEs to seek capital to drive growth, sustain innovation and create value,” he says.
Meanwhile the infrastructure in Hong Kong has received an upgrade and the exchange has now gone live with its FINI digital platform, which has been touted as signalling a new era for Hong Kong’s IPO market. “FINI is a major HKEX initiative that will significantly upgrade the IPO settlement process in Hong Kong,” Bonnie Chan, HKEX Co-Chief Operating Officer explains. “With the implementation of FINI, we are able to shorten the period between pricing an IPO and the actual trading of shares from five days to two days,” she adds.
Linking with other regions
Hong Kong has also been making strides to improve the linkages with other regions, and Eddie Wong comments that Hong Kong is building connections between ASEAN [Association of Southeast Asian Nations region] and the Middle East, which will diversify the sources of capital for the Hong Kong IPO market. “The Hong Kong Stock Exchange has included the stock exchanges of Saudi Arabia and Indonesia to its list of recognised stock exchanges, attracting Middle Eastern and ASEAN listed companies to conduct secondary listings in Hong Kong, as well as promoting cross-border listing of enterprises and regional financial cooperation,” Eddie Wong says. “This provides ASEAN and Middle Eastern enterprises with opportunities to access a wider range of regional and global investors and with a platform to drive business growth and increase market visibility. It will also further enrich the product ecosystem of the Hong Kong Exchange, provide Hong Kong investors with a wider range of investment opportunities and consolidate Hong Kong’s status as an international financial centre,” Eddie Wong comments.
Other areas in ASEAN
Meanwhile, other locations in Asia are becoming more attractive as IPO destinations, and the ASEAN region in particular is emerging as a bright and dynamic spot. According to Deloitte, Indonesia was the stand-out performer in the region, with 77 listings in 2023, raising a total of US$3.6bn, which puts it fourth in the global rankings after China, the US and the UAE.
The technology sector is showing particular promise, and there has been a great deal of attention on green technologies. Imelda Orbito, Disruptive Events Advisory Leader, Deloitte Indonesia, comments, “A new trend is on the horizon, marked by the global shift towards the renewable energy and electric vehicle battery sectors. Indonesia has set its sights on becoming a global hub in the electric vehicle supply chain, and the country is exceptionally well-positioned to attract both foreign and domestic investors alike.”
Aside from Indonesia, the other emerging IPO markets to watch in ASEAN are Thailand and Malaysia. In Thailand there have been several listings from more varied industries, such as fast-moving consumer goods as well as life sciences and healthcare. Deloitte expects the Thai IPO market to be vibrant in 2024 with 38 companies already set to go public.
In Malaysia, the IPO market has been active. Its equivalent of the Nasdaq, previously known as the Mesdaq and now called the ACE Market, has been attracting a steady flow of investors with its lower ticket offerings, according to Deloitte. “The capital market initiatives that have been announced have also boosted market vibrancy and enhanced investors’ access into the market. A formidable IPO pipeline is expected in 2024, buoyed by a healthy institutional and retail appetite, especially for consumer and tech or tech-related industries,” said Wong Kar Choon, Disruptive Events Advisory Leader, Deloitte Malaysia.
In this context there are numerous options for growing companies to go public. For ASEAN’s potential champions of the future, they have the ability to go beyond their home markets and list with cross-border IPOs. Deloitte notes that such companies are thriving and are attracting the attention of other markets around the world with stock exchanges creating various initiatives so that they can be the gateway for international investors into these companies.
With markets like Hong Kong already engaging in such initiatives, and the various moves to make stock exchanges more attractive to companies – particularly those in the technology sector – 2024 is set to be a vibrant year with plenty of options for companies that need to choose an IPO location.
