EY’s Paul Go shares ‘measured optimism’ on the Chinese IPO market

The relaxation of lockdown measures, low interest rates and a strong pipeline will contribute to China’s IPO market having another strong year in 2023, according to Paul Go, Global IPO Leader at EY. The government’s focus on fields such as digital innovation and ESG will set the pace, with more Chinese firms likely to list domestically.

The IPO market saw a dramatic downturn in 2022. Globally, IPOs fell by 45% and proceeds by 61%, while in the US alone the total number of IPOs went from 1,035 in 2021 to just 181 the following year – a drop of 82.5%.

However, Paul Go, Global IPO Leader at EY, stresses to Opto that the record levels of 2021 set a very high bar. He points out that “2022 was actually higher than 2019, the pre-pandemic benchmark, by number of IPOs”.

Indeed, certain markets bucked the trend altogether. MENA, for example, was up 115% by proceeds in 2022. Another geography where the IPO market held its own was China.

“The Shanghai and Shenzhen stock exchanges were leaders of 2022 by number and proceeds,” says Go, “while the NYSE and the Nasdaq were down 90%.”

Optimism for China’s 2023 IPO Market

Go highlights “measured optimism” in China: “the growth rate has been slow but there’s optimism it will pick up to circa 5% GDP in 2023.

“As the second-largest economy in the world, that’s not bad.”

According to Go, this optimism has three drivers. Firstly, the relaxation of lockdown measures will rekindle foreign direct investment and tourism, while also easing supply chain challenges. Secondly, unlike other large economies, China kept interest rates low through 2022; these low rates “will stimulate demand and make it easy for businesses to keep operating”. And thirdly, China has a strong pipeline of companies looking to IPO.

Changes to listings rules since Didi’s [DIDIY] 2021 IPO have boosted that pipeline. Since then, government policy has sought to encourage more of its companies to list on the country’s exchanges.

Moreover, greater transparency will result from the decision to allow the Public Company Accounting Oversight Board to access Chinese and Hong Kong auditors in August 2022, while the China Securities Regulatory Commission recently unveiled plans which should make domestic listings easier.

“These measures are trying to attract Chinese companies,” says Go. The message is: “‘Maybe you don’t need to look at US or Hong Kong. We’re making this a more user-friendly, competitive system for you to consider listing in your home country.’”

Mainland listings

A further spur to optimism came with the 9 February IPO of autonomous vehicle sensor manufacturer Hesai Group [HSAI], the largest debut of a Chinese firm since Didi, which raised $190m on the Nasdaq. While China will hope more companies like Hesai list domestically in the future, the success of the launch underscores the growing appetite among overseas investors for Chinese stocks.

Go feels that, even if Chinese companies continue listing in the US, there will still be an increase in secondary listings in Hong Kong or mainland China, and that China’s market should be able to do even better in 2023 than in 2022.

“Covid restrictions, and the geopolitical situation, should hopefully not get any worse. That should create more favourable investor sentiment.”

Trends for 2023

“If you want to have a successful IPO in China,” says Go, “you need to make sure you are following the direction of the government. Right now, they want to focus on core technology – AI, self-driving car sensors, etc. – and ESG.”

Education, which was hampered as a sector by Beijing’s policies through 2022, is in recovery. Real estate is also stabilising following a difficult 18 months. Despite many Chinese property companies’ debt trading at junk bond prices, Dalian Wanda Commercial Management raised $400m in a US dollar bond in January. It was the first publicly-sold dollar bond by a company in China’s property industry since 2021.

Go believes that, in terms of new listings numbers, technology will dominate 2023. This category covers a range of fields: SaaS, IoT and core technology, as well as ESG-related areas like battery technology and recycling.

Beijing’s desire to encourage these sectors could bring tax breaks or preferential land use approval for companies operating within them.

Settled markets

Notwithstanding his cautious optimism, Go believes that market conditions need to be right before IPO volumes will return to previous levels.

“You need less volatility, and a strong market, so that investors have greater confidence and sentiment. Pricing also has to be at the level that companies’ ownership wants. If that’s not high enough, never mind demand, supply of companies IPO-ing isn’t going to be there.”

Go is also hopeful that global inflation has peaked, which would add another layer of stability: “That would mean that interest rates can steady, giving investors some certainty when it comes to valuations for IPOs.”

Many investors will be hoping that these factors can combine to push China beyond 2022’s tally of 468 IPOs and $98.1bn raised.

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