(Bloomberg) -- Hong Kong’s biggest listing in more than three years presents a major test for the city’s struggling market for initial public offerings.
A successful stock sale and debut have the potential to bolster investor confidence following a yearslong slump that has seen issuance plunge amid China’s economic and regulatory struggles. Hong Kong’s listings have raised just $2.5 billion year-to-date, data compiled by Bloomberg show. In 2021, the figure was $42.8 billion.
Midea Group Co., a Chinese maker of household appliances, started taking orders this week for a second listing in Hong Kong that may raise as much as $3.5 billion. It’s set to be the city’s biggest debut since JD Logistics Inc. raised $3.6 billion in May 2021. At the top end of the marketed price range, Midea is offering a roughly 20% valuation discount to its stock listed in Shenzhen, at a time when Chinese consumer confidence has been dented by a property crisis and disappointing corporate earnings growth.
“A successful listing of Midea could pave the way for other companies’ listings,” said Ada Li, an analyst covering consumer companies at Bloomberg Intelligence. The market appears to be optimistic about the company’s outlook, with consensus estimates on Midea’s earnings having been raised since early this year, Li added.
Hong Kong’s IPO market has been in a slump for more than two years now, after the Chinese government cracked down on homegrown technology giants and the ill-fated US listing of ride-hailing company Didi Global Inc. weighed on Chinese debuts worldwide. On average, debutants have booked a 2.1% gain on their first day of trading this year, though those with proceeds larger than $100 million saw a 1.4% decline. Bubble-tea maker Sichuan Baicha Baidao Industrial Co. plunged 27% on its debut in April after its IPO raised $330 million.
Founded in 1968, Midea is China’s largest appliance manufacturer and sells items including air conditioners, washing machines and elevators. Its brands include Comfee, Eureka and Little Swan, and as well as the home-appliance business it acquired from Toshiba Corp. and German robotics firm Kuka AG.
Midea plans to use some of the proceeds raised to expand its global distribution channels and sales network to boost overseas sales. That’s in line with the broader push by Chinese businesses to expand abroad as local competition intensifies and consumption wanes. A broader product mix would boost Midea’s earnings as it seeks to tap into lucrative markets like North America, Europe and Southeast Asia, said Jeff Zhang, an analyst covering consumer stocks at Morningstar.
The deal slump in Hong Kong and among Chinese companies globally stands in contrast to the buzz in some other Asian markets, such as India, where debuts have raised $7.75 billion this year.
The city’s IPO woes have captured China’s attention. In June, Beijing pledged to step up support for IPOs outside of the mainland, which was seen as a potential boon for the market in Hong Kong.
There are signs that Midea’s IPO might help turn things around. Order books were covered on the first day and are now multiple times covered. Alternative asset manager Hillhouse Investment has been in talks to place an order for more than $1 billion of stock and Singapore sovereign wealth fund GIC Pte. was weighing subscribing for about $500 million in the offering, according to people familiar with the matter.
“It’s probably one of the IPOs this year that has aroused the most interest in the Hong Kong market,” Morningstar’s Zhang said.
Last month, Midea reported a first-half net income of 20.8 billion yuan ($2.9 billion), beating the consensus estimate of 18.97 billion yuan. Citigroup Inc. said the firm’s focus on growing overseas sales means it’s less exposed to the uncertainties of China’s macro environment.
The upcoming IPO is also expected to ride the momentum of the company’s Shenzhen shares, which are up 14% year-to-date compared with a 7% drop for the benchmark CSI 300 index.
How the company’s shares perform on their debut next Tuesday will be a test of whether investors are ready to absorb new shares against the backdrop of sputtering economic growth in China and ever-simmering tensions between Beijing and Washington.
“The major challenge, besides the macroeconomic issues, is that there are not that many new exciting Chinese companies in the pipeline anymore,” said Barry Wang, co-portfolio manager of the China Opportunities Fund at Oberweis Asset Management HK Ltd.
For some, the problem comes down to whether it would be worth their time looking into the listings. In the past couple of years, many of them have been small and dominated by preset allocations to cornerstone investors, who agree to hold on to the IPO shares for a period of time.
“Regardless of the company, why bother? You do all that work and you get allocated 0.01% or 0.001% of your fund,” Nicholas Chui, a China portfolio manager at Franklin Templeton, said of the thinking behind deciding on small deals. “Maybe it’s better that you let it list and then you buy it off the secondary market rather than stressing yourself out.”
Some sizable deals are in the pipeline, though the timing of the launches remains to be seen. China Resources Holdings Co. met some resistance to the potential $6 billion valuation for its beverage unit in a planned IPO in Hong Kong, Bloomberg News reported last month.
(Updates with analyst comments in fourth paragraph, background in sixth and seventh paragraphs)
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