Streamlining the transfer mechanism to the main board, adding market capitalization, revenue, R&D testing and other related reforms for high-growth companies engaged in a large number of R&D activities...... Starting from January 1, the IPO of the Hong Kong stock ChiNext has entered a new stage. According to the announcement of the Hong Kong Stock Exchange, the final plan of its GEM (GrowthEnterpriseMarket, hereinafter referred to as GEM) listing reform has officially taken effect on the same day.
The policy of "saying goodbye to the old and welcoming the new" before and after the New Year's Eve has been laid out by the Hong Kong Stock Exchange before. In 2023, the Hong Kong Stock Exchange will frequently introduce new policies in terms of trading mechanisms, listing rules, and mutual access, some of which are about to enter the landing stage in the near future. For example, the stamp duty rate of Hong Kong stocks, which was previously concerned by the market, has been reduced to 0.1%, which has taken effect on November 17, 2023.
Behind the intensive implementation of policies, the Hong Kong stock market is at a crossroads of transformation. According to the reporter, the latest listed stock on the Hong Kong GEM board is Yucheng Logistics (08489.HK), which will be listed on January 13, 2021. This shows that in the past two and a half years, Hong Kong's Growth Enterprise Market has not added "new members", and the IPO market is even more bleak as a whole. According to Deloitte statistics, in the first half of 2023, the cumulative amount of new listings raised by the Hong Kong Stock Exchange was only HK$17.8 billion, ranking sixth in the world after falling out of the top three in the world in 2021 and 2022.
Institutions believe that after the cold winter of 2023, a new inflection point for Hong Kong stocks in 2024 may be coming. On the one hand, in response to the current market dilemma, the Hong Kong Stock Exchange has recently made frequent reform policy measures, many of which will be officially implemented in 2024. On the other hand, overseas interest rates are likely to fall in 2024, and the current negative factors for Hong Kong stocks may gradually disappear.
"Cold market" Hong Kong stock IPO
As one of the hottest markets in the world, the Hong Kong stock IPO in 2023 is a little cold.
According to Choice data, there will be 70 new listings in Hong Kong in 2023, a decrease of 24 from 2022. The chill in the market has been evident since the IPO application. According to Deloitte data, in 2023, the Hong Kong Stock Exchange received about 124 listing applications, a year-on-year decrease of 30% from 177 in 2022.
From the perspective of financing, the cumulative net fundraising of newly listed companies in Hong Kong in 2023 will be 37.708 billion yuan, a significant decrease of 59.1% from 92.146 billion yuan in 2022. Deloitte predicts that the total amount and number of IPOs raised in the Hong Kong stock market will be the lowest in the past two decades, falling out of the top five IPOs in the world, ranking sixth. The Shanghai Stock Exchange, Shenzhen Stock Exchange, Nasdaq and NYSE maintained their top four positions in the global IPO rankings, while the National Stock Exchange of India rose to fifth place.
To add insult to injury, the super-large IPO of Hong Kong stocks in 2023 has begun to be "invisible". According to Choice statistics, the five IPOs with the highest net amount of funds raised in 2023 are Zhenjiu Li Du (06979.HK), WuXi Helian (02268.HK). HK), J&T Express-W (01519.HK), Ruipu Lanjun (00666. HK), Horizon C&D (09930. HK), with net proceeds of HK$4.99 billion, HK$3.53 billion, HK$3.48 billion, HK$2.01 billion and HK$1.52 billion respectively, all of which were below HK$5 billion. And in 2022, China Duty Free (01880. HK), Tianqi Lithium (09696. HK) raised more than HK $13 billion, Wanwuyun (02602.HK), Leapmotor (09863. HK) and other four companies also raised more than 5 billion Hong Kong dollars. This is equivalent to the total net proceeds of the top five IPOs of Hong Kong stocks in 2023 of only HK$15.5 billion, which is only 30% of the total net proceeds of the top five IPOs in 2022.
At the same time, the IPO of Hong Kong stocks has a single source and lacks overseas increments. According to data from the Hong Kong Stock Exchange, in the first 11 months of 2023, more than 90% of the new shares of Hong Kong stocks came from mainland companies. According to a report, Deloitte believes that the proportion of mainland companies in the number of new listings and total funds raised in Hong Kong stocks continues to rise due to the lack of overseas companies to list.
In addition to the cooling of IPOs, the privatization and delisting of Hong Kong stocks began to heat up. According to incomplete statistics from reporters, since 2023, at least 18 Hong Kong-listed companies have decided to delist, including IMAX China (01970.HK), Dali Foods (03799. HK), Yashili, etc. Most of the listed companies that have proposed privatization have mentioned that their share prices are well below the value of their companies. For example, Dali Foods said in the announcement that due to the low stock price, Dali Foods has lost the advantage of maintaining its listing status, has limited equity financing ability, and has been trading in a relatively low price range with limited trading volume.
Under the one in and one out, the reporter noticed that the number of Hong Kong-listed companies will not increase significantly in 2023. According to data from the Hong Kong Stock Exchange, in December 2023, the number of listed companies was 2,603, only six more than in December 2022.
High breakage, low valuation
While the IPO market has subsided, IPO "high breakage" has also become the norm.
According to Choice statistics, in 2023, about 40% of new IPOs in Hong Kong stocks will be issued at the lowest price, and less than 10% will be issued at the highest price. But even so, the IPO breakage rate of Hong Kong stocks (the closing price on the first day is lower than the issue price) remains high.
Among the 70 Hong Kong-listed companies listed in 2023, 36 companies broke on the first day, accounting for about 51%.
In the long run, many new stocks have fallen sharply after listing. Taking Zhenjiu Li Du as an example, the stock was listed at HK$10.82 and is now HK$9.03, down about 17%.
"The high break is closely related to the change in the enthusiasm of investors to play new. An industry insider pointed out that on the one hand, the high breakout makes investors' enthusiasm for new products weaker and their enthusiasm for participation is limited. On the other hand, the mentality of investors has changed, the market has a cold atmosphere for new stocks, and the price of new shares is difficult to support, and it is more likely that the stock price will break.
In fact, investors' enthusiasm for "new listings" has indeed shown signs of cooling. According to data from LiveReport, a third-party agency, Hong Kong stock IPOs in 2023 were subscribed by a total of 397,900 people, down 24.08% from 524,200 in the same period in 2022. Among them, October Paddy Field, which had the smallest number of subscribers, only 1,154 people subscribed.
Behind the "high breakage", the problem of poor liquidity and low valuation of Hong Kong stocks is highlighted. Valuations of Hong Kong stocks will continue to fall in 2023. Choice data shows that the Hang Seng Index will fall by 15.1% this year in 2023, and the Hang Seng Index will close in the red for four consecutive years. As of press time, the Hang Seng Index is 16,646 points, down more than 40% from the highest point of 31,183 points in 2021. Among the Hengsheng constituent stocks, Li Ning, Country Garden Services, Meituan, Zhongsheng Holdings, WuXi Biologics, JD.com, Xinyi Solar, ENN Energy, Longfor Group and JD Health fell by more than 45% during the year.
Image source: Guosen Securities Research Institute
The overall liquidity of Hong Kong stocks has also been shrinking. According to data from the Hong Kong Stock Exchange, in the first seven months of 2023, the average daily turnover of Hong Kong stocks was only HK$113.6 billion, down 31.8% from the average daily turnover of HK$166.7 billion in 2021. Compared with the daily trading volume of A-shares of 300 billion ~ 500 billion yuan and Nasdaq of about 500 billion US dollars, the trading volume of Hong Kong stocks is even more sluggish.
"Many small and medium-sized IPOs were interrupted last year, and Hong Kong stocks are now falling too fast for small and medium-capitalization companies, and the price in the secondary market may be cheaper than the IPO price. A South China brokerage told reporters that with the current liquidity of the Hong Kong stock market, it is difficult for small and medium-sized IPOs to raise funds even if they are listed.
Transformation crossroads
Hong Kong stocks are standing at the crossroads of the old and the new. In 2023, the frequency of policy planning and implementation in Hong Kong's capital market is further accelerating.
From the perspective of listing rules, in March 2023, the Hong Kong Stock Exchange launched a listing mechanism for specialist technology companies, and added a new chapter 18C to the Main Board Listing Rules to allow technology companies with no revenue and no profit to list in Hong Kong. In the research report, PricewaterhouseCoopers predicts that there will be 3~5 special technology new shares listed this year, raising an average of more than HK $1 billion.
In 2023, companies have already gone public through this mechanism. According to public information, BlackSesame International Holding Limited (Black Sesame Intelligence) previously submitted a prospectus to the Hong Kong Stock Exchange and successfully listed Hong Kong stocks under the 18C rules.
The controversial Hong Kong GEM board has also ushered in new changes. On 26 September 2023, the Hong Kong Stock Exchange (HKEX) published a consultation paper to solicit market opinions on the GEM listing reform, proposing to introduce a "simplified transfer mechanism", which was officially implemented on 1 January.
From the perspective of liquidity optimization, on November 17, 2023, the rate of stamp duty on Hong Kong stocks was reduced from 0.13% to 0.1%. On 19 December 2023, the Secretary for Financial Services and Inventory of the Hong Kong Special Administrative Region, Mr Christopher Hui, announced the "New Capital Entry Scheme", which requires eligible applicants to invest HK$30 million (or more) in Hong Kong within two years prior to the application to enter Hong Kong, aiming to attract more capital to settle in Hong Kong.
From the perspective of Stock Connect, on 19 June 2023, HKEX officially launched the "HKD-RMB Dual Counter Model", providing issuers and investors with a choice of HKD and RMB-denominated stocks. On 25 October 2023, John Lee, Chief Executive of the Hong Kong Special Administrative Region, said that he would make every effort to promote the inclusion of the RMB counter in the Hong Kong Stock Connect to facilitate RMB-denominated trading of Hong Kong stocks. In addition, there are many enhancement measures, such as the launch of Northbound Swap Connect and the addition of more than 1,000 underlying stocks to the Stock Connect.
In addition, the high-level change of the Hong Kong Stock Exchange is imminent. The Hong Kong Stock Exchange disclosed on December 15 last year that the board of directors appointed Chan Yiting as the next chief executive officer of the group, effective from May 24, 2024, for a term of three years until May 23, 2027. In addition, HKEX Group Deputy Chief Executive Officer and Co-Chief Operating Officer will be Yiu Ka Yan and Lau Pik Yan. The new senior management team has many years of experience in the Hong Kong Stock Exchange, and there is a view in the industry that the new senior management team may further deepen the reform after taking office.
Will 2024 usher in an inflection point?
Looking forward to 2024, many institutions believe that the inflection point has arrived.
"With the increase in policy stimulus and the downward trend of interest rates overseas, the fundamentals of Hong Kong stocks are already on the way to recovery. Wang Xueheng, chief analyst of Guosen Securities' overseas strategy research, expects the Hang Seng Index to run between 16,000 ~ 23,000 points in 2024.
Overseas interest rates continue to rise, which is considered to be the key reason for the outflow of funds and the lack of liquidity in Hong Kong stocks, and the recent reversal of overseas interest rates is coming. On December 14, 2023, the Federal Reserve released the December 2023 FOMC meeting (Federal Reserve Interest Rate Meeting) statement, announcing another pause in interest rate hikes. Fed Chairman Jerome Powell's speech at the post-meeting press conference was also more "dovish", saying that interest rate cuts have begun to come into view, and policymakers are thinking about and discussing when to cut interest rates. According to Guosen Securities Research Report, the Federal Reserve will begin to cut interest rates and stop shrinking its balance sheet in the second quarter of 2024.
"The risk-free interest rate pivot is expected to fluctuate and fall as the Fed's interest rate hike cycle gradually ends, and global funds will gradually start to trade interest rate cuts. Wei Wei, chief strategic analyst of Ping An Securities, believes that the current liquidity inflection point of Hong Kong stocks has arrived. In addition, risk appetite is expected to improve marginally with new developments in U.S.-China relations. In November 2023, the heads of state of China and the United States met and reached a number of consensuses, further opening up more possibilities.
Where are the future investment opportunities in Hong Kong stocks? Wang Xueheng pointed out that large consumption already has a good cost performance. At present, some large consumption companies have fallen into the list of high dividends, which shows that the pessimism of the sector has reached the bottom, and the layout can be started according to the upward revision of performance. In addition, he also recommended Hang Seng Technology, high-tech manufacturing, innovative drug industry and other fields.
Wang Chao, chief strategic analyst of China Galaxy Securities, believes that in 2024, the Hong Kong stock market may usher in opportunities due to the easing of international geopolitical conflicts, the improvement of Sino-US relations, and the rising expectations of possible interest rate cuts by the Federal Reserve. As the Fed ends its interest rate hikes and starts to cut interest rates, foreign investment is likely to return, especially in sectors with large outflows in the early stage (such as information technology, finance, consumer discretionary, real estate and construction, health care, etc.).
(Xi student Zou Zheng also contributed to this article)