In what has been a tepid first half of 2023 for the global initial public offering (IPO) market, the Asia Pacific region remains the only bright spot in an otherwise lacklustre vista.
According to figures from EY, Asia currently dominates in terms of global launches and has an approximate 60 per cent share of the volume and value of IPOs worldwide.
In the first half of 2023, the Apac region raised $39.4 billion from 371 IPOs, marking a year-on-year (YOY) decline of 2% in terms of volume and 40%, in terms of value.
While half of the top 10 global IPOs have come from China, dealmakers wait anxiously to see whether spin-offs from mainland tech giants such as JD.com and Alibaba, will reignite the market in the second half of the year.
Such activity by big tech players could facilitate a return to form for Chinese tech stocks, following the ferocious regulatory crackdown on the sector by the Chinese government in 2021, after Ant Group’s failed IPO in November 2020.
Alibaba, for its part, aims to split its $220 billion empire into six units, in a move that could provide a boost to Hong Kong’s flagging market. JD.com, meanwhile, has plans to hive off its logistics arm, Cainiao Network Technology, and two other subsidiaries - Jingdong Property and Jingdong Industrials.
The break ups would help achieve Beijing’s aim of reducing the power of China’s tech giants, while unlocking their value onto the market.
Strategic sectors
Louis Lau, capital markets partner, KPMG China, told FinanceAsia that the technology, media, and telecoms (TMT) sector, as well as the healthcare-life sciences segment, would be likely to propel growth in the IPO market in the second half of 2023.
“As of 31 July 2023, these two sectors account for approximately 50% and 40% of the active IPO pipeline in the Hong Kong and A-share markets, respectively,” he said.
“The A-share IPO market is backed by a robust pipeline comprising over 1,000 listing applicants across various markets, and it will receive additional support from the Chinese Government's commitment to stimulate economic recovery.”
With regard to Hong Kong’s IPO market, he anticipates any uptick in activity to be driven by international and Chinese mainland company spin-offs, as well as the emergence of specialist technology firms in the upcoming quarter.
Rate and real estate recovery
Ultimately however, much will hinge on the US Fed and rate hikes going forward.
“The extent to which the recovery will depend on a relaxation in rate hikes is significant. A decrease in rate hikes could encourage spending and investment, both of which are essential for economic recovery,” Lau noted.
“The announcement made by the US Federal Reserve in June, signalling a pause in interest-rate hikes, has influenced market expectations and reduced monetary uncertainty. This factor has already been taken into account and could contribute to supporting the ongoing recovery.”
Zoe Shi, Partner, KPMG China, said that optimism remains high for China’s venture capital (VC) sector, which could receive a boost from IPO growth in China and Hong Kong. She explained that local governments in China are increasingly collaborating with VC firms to invest in startups and to provide various types of support to the overall ecosystem.
“There is also some hope for stronger IPO activity in Hong Kong and the Chinese mainland during the second half of the year, particularly given the planned spin-offs of a number of tech giant Alibaba’s business units,” she said in an emailed industry commentary.
“The success of these spin-offs could spur other IPO activity, while potentially also driving a new wave of interest in technology companies in China.”
Jason Yu, head of Multi Asset Management, Asia at Schroders said in a market update that despite the optimism of Chinese government backing for the tech sector, investors should remain cautious and refrain from significantly adding exposure to the market.
“At present, the main challenge facing the investment markets in mainland China is lagging consumer confidence, primarily influenced by the slower recovery of the domestic real estate market,” he said.
“Given that real estate investment constitutes a significant portion of the overall wealth of mainland China households, their caution towards spending and investing more is understandable when the future of the housing market looks uncertain.”
However, he added that mainland China’s policy support for strategic industries is poised to propel the tech sector to overtake real estate as a major driver of economic growth.
“Noteworthy sectors include new energy vehicles, renewable energy, consumer services and semiconductors. Backed by national policies, these industries are expected to present a more stable outlook and play a pivotal role in China's future economic development,” he said.
According to Andrew Collier, managing director at Orient Capital Research, the listing of the Alibaba and JD.com subsidiaries later this year is likely to be the shape of things to come as far as China IPOs are concerned.
“China is happy to allow smaller tech companies list in Hong Kong – they just don't want them to grow large and powerful,” he told FA.
“The break-up of Alibaba into six pieces was the ideal format for the leadership; raise foreign capital but don't let any tech company become a dominant player. That means we are going to see a much smaller set of companies list in China.”
He proposed that going forward, China’s large tech companies will either raise capital domestically or split into smaller pieces.
“However, no one is exactly sure what size is threatening to the Chinese state.”
Both JD.com and Alibaba did not respond to requests for comment.
