In the recent recession and depressed capital market, companies listing on the Growth Enterprise Market (GEM) are favored by the rules that allow a migration to the Main Board (the “springboard” effect), according to leading accounting firm BDO.
Furthermore, the “placing” mechanism makes Initial Public Offerings (IPOs) of GEM easier to launch than the Main Board IPOs under the “public offer” mechanism. Will there be a pleasant surprise in GEM IPOs in 2012?
Andrew Lam, assurance partner of BDO Hong Kong says, “We have seen around 50 GEM companies in aggregate migrate to the Main Board over the past four years, which is an evidence of the popularity of GEM as a springboard for companies to obtain a listing status and raise further capital on the Main Board. In addition, the GEM rules allow IPO by placing. Capital market liquidity is of a lesser concern to GEM listing applicants. The comparatively smaller shareholders pool of GEM listing applicants is also a relevant factor contributing to potentially good post-IPO share price performance.”
Over the past three years, the number of new listings and amount of funds raised in GEM IPOs have been continuously increasing. In January 2012, there have been three successful GEM IPOs, including the first IPO of the year. Although the GEM board in Hong Kong has once been questioned by the public about its reputation and effectiveness to provide an alternative venue for start-up enterprises to raise capital, a number of factors have accelerated GEM IPOs in recent years and these factors have particular effects in a depressed market.
Lam comments, “The listing requirements of GEM are favorable to companies who wish to obtain a listing status, particularly during economic turmoil. Unlike the rules of the Main Board, GEM rules do not have a profit requirement. Its cashflow requirement is also comparatively low, which is a significant feature that helps lessen the burden for companies without a strong cashflow in a depressed time. We expect to see an increasing number of GEM IPOs this year, possibly reaching 15 to 20 with an average deal size of HK$100 million each.”
On the other hand, there was a decline in number of IPOs and fund raised last year on the
Main Board (from 94 IPOs with over HK$448 billion raised in total in 2010 to 76 IPOs with over HK$257 billion in 2011). Under the public offer mechanism of the Main Board, the IPO offer price is usually determined based on the listing applicant’s profitability, whereas the investors’ response is largely affected by the liquidity of the capital market. Given the current depressed market, a number of IPO cases have lapsed or been delayed.
Liquidity in major overseas capital markets is tight. The Eurozone financial crisis is perceived to be worse than 2008’s crisis in the US because different European countries have different agendas. In the worst case, financially weaker countries may go bankrupt when they are not permitted to print more money to meet their liquidity needs. The US and China markets are not transparent enough due to changes in government leadership in 2012.
“There was a rush of IPOs at low pricing in December 2011, which is a reflection that some issuers were pessimistic about the first half year of 2012. However, we see a possible rebound of the IPO market in the fourth quarter. There are signs that the European countries may work more closely to overcome the Eurozone financial crisis. In the US and China, we may see some favorable policies to activate the financial market after changes of government leadership. In Hong Kong, overseas companies will continue to see the capital market in Hong Kong as the primary source to obtain funding from the mainland. The capital market in Hong Kong is an oasis in this global economic depression,” Lam anticipates.
“There is a strong pipeline of more than 100 potential projects at the beginning of 2012. We anticipate many of these IPO projects would benefit if and when the market recovers in the last quarter of 2012. In terms of amount of funds raised, the Hang Seng Index (HSI) companies in Hong Kong were on average trading at a PE ratio of less than 10 as of the end of 2011, which is generally considered as the minimum threshold for a bull market of IPO. Against these market circumstances, we foresee the number of deals will stay high with approximately 80 IPOs in 2012, but the deals will tend to be at low PE ratios with around HK$200 billion raised in total, leading to the lowest amount raised since 2009.” Andrew Lam concludes.