Asia Corner: Hong Kong Stock Market Slumps Amid Regulatory and Market

hong kong StoCk mARkEt SlumpS Amid REgulAtoRy And mARkEt pRESSuRES

Reversing the strong start in the first months of 2021, Hong Kong stocks were hit by a multitude of obstacles throughout the year ranging from China’s widespread crackdowns across numerous industries, uncertainly of contagion from China’s real estate industry to increasing geopolitical tensions between the US and China. As of November 8th, the Hang Seng Index was down around 10% for the year.

Dragging down the market is a weakening sentiment for Chinese tech stocks which represent approximately a quarter of the index’s weighting. This summer, China shook up the markets in an unprecedented crackdown covering a broad range of industries as it moves to build a fairer society through its “common prosperity” policy. The regulatory crackdown gave rise to an atmosphere of uncertainly around the unpredictability of China’s economic and financial policies and increased investors’ anxiety as hundreds of billions of dollars were wiped out from global markets. Leading the broader crash in Chinese tech stocks was video streaming platform Kuaishou Technology which raised $6.2 billion in February in the largest IPO in Hong Kong this year. Kuaishou is among the worst performing stocks of the year down over 69% from its initial offering as its business took a blow from China’s policies to curtail inappropriate online content and the influencer industry. China set limitations on the time and content minors can consume on gaming, live-streaming platforms and social networks in its newly published 10-year national guidelines on children’s development. The government also put the brakes on its $70 billion online education industry by banning tutoring firms from making a profit on subjects taught in school causing New Oriental Education to plunge over 85% for the year. Additionally, Macau’s casino stocks lost $17 billion after authorities proposed regulations to tighten oversight, and some medical beauty stocks suffered following a government move to tighten advertising guidelines in the industry. However, in the light of the lower than expected GDP of 4.9% for the third quarter, investors are expected to get some relief as China eases on its common prosperity policies in an effort to rejuvenate growth.

Additional concerns weighing on Hong Kong’s market is the uncertainly around China’s $62 trillion real estate market which contributes to approximately 28% to 30% of the country’s GDP. China’s second largest property developer, Evergrande, made worldwide news as it experienced a liquidity crunch in September. Contagion effects have rattled investors as risk of a fallout could impact the economy with problems spilling over to direct and indirect suppliers, many of which are small and medium-size enterprises. Six developers have so far run into trouble. According to The Guardian, nearly a third of China’s property developers may struggle

to pay their debts over the next twelve months while credit agency S&P warned many other property developers could be headed for bankruptcy. Shui On Land submitted an application for its Xintiandi division. The spin-off could raise at least $500 million in a public offering next year.

While investors remain cautious about the macro environment, Hong Kong’s deep liquidity and access to international investors continues to attract mainland companies. IPO and secondary listings in Hong Kong reached record level in the first nine months of 2021, raising $35.9 billion for 73 companies, according to Refinitiv. A further 200 companies are in the pipeline to launch their IPO in Hong Kong, the highest on record. Homecoming listings are leading Hong Kong’s IPO market as China intensifies oversight on overseas listings. Homecoming listings Baidu, Bilibili, Trip, and online car portal Autohome raised a combined $8.1 billion, representing approximately 31% of the city’s IPO proceeds in the first six months of 2021. Xpeng raised $1.4 billion in its summer dual listing debut while LiAuto raised $1.5 billion. Electric vehicle makers are specifically attracting investors as China looks to dominate the global electric vehicle market. With tighter oversight and restrictions from both China and the US, more mainland firms are revaluating plans to list in the U.S. Chinese lifestyle platform Xiaohongshu (Little Red Book), e-commerce platform Meicai, Hong Kong logistics start-up Lalamove, medical data solutions provider LinkDoc Technology, bike sharing firm backed by Ant group, Hello Inc, China’s artificial intelligent chip firm Horizon Robotics, social platform popular with Gen-Z SoulGate Inc, China’s biggest online audio platform Ximalaya and the fitness app Keep are among the firms that have delayed or scrapped listing plans in the US in recent months. Many have already entered discussions to go public in Hong Kong.

While the pace of IPO listings weakened in the third quarter as dozens of companies paused plans to list amid increasing regulation, there are positive signs for future IPOs as markets expect activity to pick up again in 2022. The much anticipated IPO for China’s largest artificial intelligence company, SenseTime Group, was announced in late August with the company possibly raising up to $2 billion. Electric vehicle market Leapmaker has just picked three banks for its planned $1billion Hong Kong IPO. Asian logistic carrier, 58 Freight also filed its application to list in Hong Kong while Malaysia’s Top Glove, the world’s biggest rubber glove maker, is renewing its plan to list in Hong Kong as it looks to raise up to $545 million in a dual listing to attract a new group of investors. After scrapping plans to list in the US, Shanghai –based property firm Hong Kong’s fastest growing IPO market segment is biotech with the number of total listing possibly tripling this year and over 50 healthcare companies in the pipeline to list in the city. Hong Kong Exchange has been striving to become the global leader in biotech fundraising after making major reforms to listing requirements in 2018 and is on track to overtake NASDAQ in five to ten years. Fueling new listings is China’s move to become a biotech superpower as the sector is growing at a torrid pace and leaders are emerging in critical areas such as cancer treatment. According to McKinsey, China’s biotech industry is expected to advance in three major areas, faster drug development, deeper differentiation, and the ambition to make an impact on the global innovation landscape. In just over the past twelve months, Chinese biotechs have signed a record 12 major out-licensing deals for innovative drugs with MNC. Founder and managing partner at leading biotech venture capital firm Lilly Asia Ventures, Shi Yi, stated that around 90% of the Chinese healthcare companies in its portfolio have plans to go public in Hong Kong.

Still some companies are taking a more caution approach as several potential billion dollar IPOs have fallen by the wayside during China’s regulatory onslaught. NetEase Inc delayed the $1 billion Hong Kong IPO of its music streaming service Cloud Village because of volatile trading in China’s major tech companies. IPO applications for Tencent backed We Doctor and WM Tech lapsed as oversight increases on business operations and how tech giants’ mange the data collected. WeDoctor was seeking to raise up to $3 billion while supermarket owner WM Tech was looking to raise up to $1 billion. Additionally, real estate trading platform, Anjuke’s IPO application that was submitted in April has become invalid.

Ms. Leslie Richardson has over 20 years of investment management and equity research experience. She operates a boutique investor relations firm in Hong Kong for Asian companies listed in the U.S. and Hong Kong. She also assists private companies develop investment material and build an investor following in preparation for a public listing. Additionally, she is the Asian Correspondent for Micro-Cap Review, www.microcapreview.com, a financial magazine focused on mirco-cap companies. Previously, she worked for CCG Elite in assisting Asian-based, U.S. listed clients formulate key communication strategies. Ms. Richardson began her investment career at U.S. Trust Company then went on to join Odyssey Advisors as a portfolio manager and Director of Research. Ms. Richardson specialized in high growth sectors such as bio-tech, alternative energy, IT and telecommunications. She earned her M.B.A. from the University of Southern California. Ms. Richardson is based in Hong Kong. www.elite-ir.com.

Leslie Richardson does not own shares in any of the companies mentioned.