Is IPO Fever Returning to the Hong Kong Market ?

Hong Kong

After months of lackluster activity, the buzz is back in Hong Kong's IPO market as several big companies prepare to list in this once hot destination for raising capital.

Smooth leadership transitions in both the U.S. and China, together with an increase in risk appetite has seen many companies announce plans to raise funds in Asia's financial hub before the year-end.

The largest being Chinese insurance giant the PICC Group (People's Insurance Company of China), which expects to raise around $3.6 billion in a listing next month.

Shanghai-based property developer CIFI Holdings and Hong Kong retailer Casablanca, which sells bedding products, debuted on the Hong Kong market on Friday, taking the total deal volume to $6.9 billion so far this year, according to data provider Dealogic.

Despite this flurry of deals, market watchers told CNBC they doubt this momentum will carry forward beyond February next year and Hong Kong is unlikely to return to the glory days of 2010 and 2011, which saw $67.8 and $35.4 billion, respectively, raised via IPOs.

Philippe Espinasse, ex-investment banker and author of 'IPO: A Global Guide', told CNBC that part of the recent increase in activity is seasonal, as the fourth quarter typically sees a rise in companies coming to the market to list before financial statements go "stale."

"Last year it was the same thing - we had several large deals come to market (at this time)," he said.

While a listing by the PICC Group sends a positive signal, as it would be the biggest mainland firm to list in Hong Kong since the Agricultural Bank of China's (Hong Kong Stock Exchange: 1288.HK) $22.1 billion deal in 2010, Espinasse said this does not mark a turning point for the market.

The absence of sovereign wealth funds and well-known institutional investors in the pool of the insurer's cornerstone investors indicates that market players are "quite cautious" with this transaction, he added.

A large number of PICC's cornerstone investors - or those who are guaranteed big allotments of shares in an IPO in exchange for agreeing to hold the stock for a specified length of time - include Chinese state-owned enterprises.

"It would take more than one deal like this for the market to fully re-open. We need to see 2 or 3 deals, where investors make money and the stock trades up in the secondary market," Espinasse said.

Hong Kong to Regain IPO Crown?

While the IPO momentum is forecast to continue into January 2013, leading up to Chinese New Year - which falls on February 10-11 - analysts said the outlook beyond that remains cloudy.

Alex Wong, analyst at finance advisory services firm, Ample Capital, said it will be difficult for Hong Kong to attract the same level of IPO activity seen in recent years.

This year, the Hong Kong Stock Exchange (HKEx) slipped down the rankings in terms of funds raised via new listings. The HKEx ranked fifth, below the United States, China, Japan and Malaysia, which are in 1st to 4th place, respectively.

"There aren't many big-cap companies left in China which are unlisted, so we need to see promising private enterprises emerge before we see strong fever for IPOs in Hong Kong," Wong said.

Hong Kong has attracted a host of foreign companies looking to raise capital, especially in the luxury and resources sector, like French cosmetics company L'Occitane (Hong Kong Stock Exchange: 0973.HK) and Canadian oil company Sunshine Oilsands (Hong Kong Stock Exchange: 2012.HK).

But Wong said, "The appetite for resource (stocks) has decreased, and the luxury sector has seen slower momentum. It will be difficult to see a recovery next year as well."

Shares of Sunshine Oilsands, for example, have fallen almost 40 percent since the company's Hong Kong listing in March.

Espinasse also expects deal volumes to be in the range of $10-$15 billion in the coming years, a far cry from 2010-2011.

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