December 30, 2024
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Global Long-Term Investments Rebound

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In a significant shift in the dynamics of China's initial public offerings (IPOs), optimism is making a comeback among long-term international investors. After experiencing a decline in investment participation levels throughout 2023, recent comments from industry experts signal a renewed vigor in the market. According to Wang Yajun, Co-Head of Asia (excluding Japan) Equity Capital Markets at Goldman Sachs, there has been a clear rebound in the participation of international long-term funds, both in terms of the number of investors and the scale of subscriptions.

“The Wind is Here”

In a historical context, Chinese enterprises had been raising approximately $80 billion a year in overseas capital markets for almost twelve years leading up to 2021, leading to a total of nearly $1 trillion in funding during that period. However, the two-year adjustment period saw a dramatic reduction in this financing activity, with only $23.4 billion raised in 2023—an almost 80% decrease compared to previous levels. Encouraging trends began to surface in the fourth quarter of 2023, signaling a reversal of fortunes. Data from Goldman Sachs indicates that as of now in 2024, Chinese enterprises have raised $41 billion in offshore capital markets (primarily in Hong Kong and the United States), nearly doubling the amount from the previous year. Wang anticipates that this figure could reach between $50 billion and $60 billion in 2025, marking a continuous growth trajectory of about 25% to 30% compared to 2023. At the end of last year, international investments began gradually returning to the Chinese market, according to Wang. The true turning point, he notes, has been the comeback of international long-term investors. Market activity has shown a rebound in the average financing scale of individual projects as well. Between 2010 and 2021, the average annual offshore IPO issuance scale for Chinese issuers was $34.8 billion. This figure plummeted to just $12.6 billion in 2022 and further dropped to $6.3 billion in 2023. However, the number has increased to $12.3 billion so far in 2024. This indicates a renewed vibrancy in the market. Moreover, Wang highlights that the recovery of the IPO market is not solely a matter of increased volume; it is also reflected in the rising number of sizable projects. Publicly available information indicates that in 2024, there have been seven large IPO projects by Chinese issuers, each exceeding $500 million. Among them, Midea raised $4.57 billion through its IPO in Hong Kong, while Amer Sports, the parent company of the brand Arc'teryx, secured $1.57 billion in the U.S. IPO market. Notably, other sizable IPOs completed this year include SF Holding, Horizon Robotics, China Resources Beverage, ZEEKR (where the focus is on electric vehicles), and Pony.ai, a leader in autonomous driving technology. Goldman Sachs has uniquely positioned itself within this recovery phase, executing three major Hong Kong IPOs and three prominent U.S. IPOs for Chinese enterprises in 2024 and serving as the lead underwriter on four of these projects. Furthermore, the revival of the overseas IPO market is evident through the engagement of international long-term funds, the quantity and scale of projects available for issuance, as well as their stable performance moving forward, according to Wang's analysis.

The Underlying Logic of Market Recovery

A key question arises—what drives this market recovery? Wang identifies three primary factors supporting this resurgence. Firstly, there is the underpinning strength of the fundamentals. Since the economic stimulus policies rolled out by the Chinese government starting September 24, several of the large IPO projects have been executed following these policies, reflecting their impact on investor sentiment. After the meeting on December 9, which emphasized the need for “more proactive fiscal policies and appropriately loose monetary policies,” shares of popular Chinese stocks surged collectively. Wang believes these measures are fundamental to restoring international investors' confidence in China's capital markets, with the economic stimulus plans clearly reshaping expectations for the Chinese economy and stock markets. The second reason behind the recovery is the robust resurgence in the secondary market, which further bolsters market confidence. Lastly, the attractive valuation of the Chinese market compared to other international markets plays a crucial role. Currently, the S&P 500 shows a price-to-earnings (P/E) ratio of 23, while the MSCI India index is at 24, but the MSCI China index stands at only 10.5, making it an appealing option for investors looking for value. Wang is optimistic that the recovery in the IPO market will continue to foster revived activities within convertible bonds and refinancing markets. Nonetheless, amid this optimistic outlook, Chinese issuers must also exercise caution and approach market opportunities with a balanced mindset. Firstly, not every company is guaranteed to succeed in listing; during the early stages of recovery, overseas investors hold high expectations regarding the quality of listing firms. In addition, it is essential to adapt to a new market pricing environment. Many issuers might reference previous valuation rounds, but given the current market adjustments, companies pursuing IPOs may find their valuations lower than in earlier funding rounds. Moreover, expectations regarding issuance scale should be realistic; based on this year's trends, a $1 billion offering is already seen as sizable. Wang emphasizes that the key to a successful IPO project lies in capturing the attention of international long-term funds. Furthermore, issuers must also account for geopolitical considerations, particularly the influence of the U.S.-China relationship on offshore IPO activities.