A record number of Chinese companies are going public, setting the stage for what could be a banner year in IPOs. We sat down with James Wang, who heads the China Equity Capital Markets group for Goldman Sachs, to talk about the landscape for Chinese IPOs.
Can you describe the pace of activity for Chinese IPOs this year and how it compares with prior years?
JW: This year has been an exceptional year for IPOs. Chinese companies accounted for more than 30% of the global IPO market through October, compared to about 23% for the same period last year. To put those numbers into context, that means Chinese companies have raised more than $53 billion this year from both Chinese and foreign investors. What’s notable is that a big part of the IPO activity is happening on offshore exchanges. According to Dealogic data, Chinese corporates have raised close to $37 billion from offshore IPOs so far this year, more than tripled from the same period last year. For our part, we’ve had the strongest deal flow from Chinese issuers in more than a decade.
What’s driving the surge in IPO activity?
JW: After years of strong growth in their home market, many of these companies have reached the type of scale that makes them good candidates for IPOs. The “new economy” theme has defined the Chinese IPO landscape this year, with the technology, media and telecom (TMT) sector accounting for two-thirds of the offshore IPO market year-to-date. Changes in the Hong Kong Stock Exchange’s listing rules earlier this year — which allow companies with dual-class structures to list and make it easier for biotech firms to launch their IPOs — have also spurred both tech and biotech companies to go public in Hong Kong.
How do companies decide where to list their shares?
JW: There are many considerations in determining where companies decide to go public: what markets to expand into or make future acquisitions, or which markets offer the best valuations or liquidity, to name a few. Businesses also look at where their peers are trading or where their investors are. But a primary reason why many Chinese companies do their IPOs overseas is that markets such as the US and Hong Kong are simply more familiar with early-stage companies that may not yet be profitable. For example, the Shanghai Stock Exchange only began allowing unprofitable companies to go public this past June — so far no such listings have taken place. On the other hand, the US and Hong Kong exchanges have allowed companies that have yet to generate profit to list and investors there are more familiar with these high-growth companies. An offshore listing also gives a company access to foreign currencies needed for future expansion and strategic M&A activity overseas.
How are macroeconomic, recent market volatility and current geopolitical factors likely to affect IPO activity?
JW: Despite the macro headwinds and market volatility, China’s transition from an investment- and manufacturing-based economy to a consumption-based one is ongoing and represents great potential for growth across many sectors. China’s income growth will eventually create the world’s largest middle class that’s already reshaping consumption. There will, of course, be bumps along the way but the general direction remains an upward trajectory, which will continue to provide a favorable environment for IPOs.
Some recent IPOs haven’t traded well in the secondary markets. Will this dampen investor interest in future deals?
JW: Short-term performance of new listings is often tied to the broader market performance. In this case, we’ve seen the overall market decline globally. But in the long run, investors will still want to buy into China’s growth story.
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