Chinese firms eye IPO resurgence in the U.S. and Hong Kong

The landscape for Chinese companies seeking initial public offerings (IPOs) in the United States and Hong Kong is showing promising signs of revival, as analysts anticipate an increase in listings next year. This optimism is fueled by several successful public offerings outside mainland China this year, which have renewed investor confidence in lucrative exits.

On October 25, 2024, Chinese autonomous driving firm WeRide made its debut on the Nasdaq, with shares climbing nearly 6.8% on the first day of trading. Earlier this month, another player in the autonomous vehicle sector, Pony.ai, submitted its listing application for Nasdaq, reflecting the ongoing ambition of these companies to enter the public market.

The backdrop for these developments is marked by a period of caution following Didi’s IPO in the summer of 2021, which came under intense scrutiny from regulators in both the U.S. and China. Didi’s subsequent challenges, including a halt on new user registrations and an eventual delisting, have cast a long shadow over the IPO aspirations of many Chinese firms.

In the wake of these events, U.S. and Chinese authorities have clarified the guidelines for listing Chinese companies in New York, but geopolitical tensions and shifts in the market have significantly dampened the flow of such IPOs. Marcia Ellis, co-global president of Morrison Foerster’s private equity practice, expressed a sense of cautious optimism, indicating that the IPO market is expected to rebound in 2025, bolstered by declining interest rates and the conclusion of the U.S. presidential election cycle.

Despite ongoing regulatory concerns, many issues that previously hindered the perception of U.S.-China listings have been addressed, leading to renewed interest from Chinese firms in both Hong Kong and New York as they face challenges in gaining approval for listings within mainland China. Investor pressure for quicker exits is driving this trend.

This year alone, approximately 42 companies have taken the plunge onto the Hong Kong Stock Exchange. As of late September, there were 96 IPO applications awaiting approval, illustrating a robust pipeline of potential listings. Recent entries include Robotics Horizon, a developer focused on artificial intelligence and automotive chips, and CR Drink, a state-owned bottled water enterprise, both of which successfully went public in Hong Kong.

Renaissance Capital, which monitors global IPOs, highlighted these two offerings as the largest of the year, excluding those companies also listed on the mainland. Looking ahead, SF Express, a major delivery service, is planning an IPO in Hong Kong next month, while Chinese automaker Chery is eyeing a listing in the following year.

However, the overall pace of IPOs in Hong Kong has been slower than anticipated, as noted by George Chan, EY’s global IPO leader. He pointed out that the fourth quarter is typically not ideal for new listings, and many companies may prefer to wait until early next year to launch their public offerings. Chan reported that early-stage investors remain optimistic about 2025 and are preparing companies for future IPOs, particularly in sectors such as life sciences, technology, and consumer goods.

Investor sentiment towards Chinese stocks has brightened recently, bolstered by government stimulus measures and lower interest rates, which enhance the attractiveness of equities compared to bonds. The Hang Seng Index has seen a more than 20% increase this year, reversing four years of decline.

Many Chinese firms opting for listings in Hong Kong see this as a preliminary step to gauge investor interest before pursuing listings in other markets. Ellis noted that while geopolitical tensions favor Hong Kong as a listing venue, the depth of the U.S. capital markets remains compelling for many companies, especially those in advanced technology sectors that may not yet be profitable but believe they will attract favorable reception from U.S. investors.

According to EY, foreign-based companies accounted for just over half of all IPOs in U.S. stock markets since the beginning of 2023, marking a two-decade high. Notable examples include the electric vehicle manufacturer Zeekr and the American sports brand, both of which made their public debuts in the U.S. earlier this year.

Windrose, a Chinese electric truck manufacturer, is also planning to list in the United States in the first half of 2025, with intentions for a dual listing in Europe by year’s end. The company aims to deliver 10,000 trucks by 2027 and has recently moved its global headquarters to Belgium.

The anticipated revival of Chinese IPOs in both the U.S. and Hong Kong is expected to provide a much-needed liquidity event for venture capital funds that have invested in startups. The previous scarcity of IPOs had diminished the incentive for these funds to support early-stage companies.

Investor interest in China is resurging as capital flows shift back toward the region, following a period of investment focus on markets like India and the Middle East. Lai from Preqin remarked on the increasing potential in China, highlighting improvements in return prospects, company valuations, and the overall exit environment.

While the recovery in investor activity is still in its infancy compared to pre-pandemic levels, some investments are beginning to emerge, particularly in consumer sectors such as beverage chains and grocery retailers. As the market stabilizes, the outlook for Chinese IPOs appears to be brightening, setting the stage for a more dynamic investment landscape in the coming years.