Chinese appliance maker Midea Group Co’s US$4 billion listing in Hong Kong is fuelling cautious optimism that the worst of the city’s capital markets drought may be coming to an end.

Midea’s Hong Kong-listed shares jumped almost 8% from its offer price on Tuesday, a strong performance that vindicates the company’s decision to price at the top of the range and increase the size of the share sale by 15%. The listing was Hong Kong’s biggest since Kuaishou Technology’s US$6.2 billion initial public offering in early 2021. Beyond a much-needed fee bonanza for banks, the deal has been closely watched as a sign of the city getting its mojo back after years of slumping deal activity.

“The Midea IPO is definitely sending a positive message to the ECM market in Hong Kong,” said Christine Xu, a partner and head of Greater China equity capital markets at law firm Linklaters. “Whether this is going to represent a turning point, I’m cautiously optimistic about the change.”

Global investors have largely steered clear of Hong Kong IPOs in the last couple of years amid concerns over China’s struggling economy as well as Beijing’s regulatory crackdowns and geopolitical tensions with the West. Many IPOs have been small, sub-US$100 million offerings often referred to as “friends and family” deals.

Excluding Midea, Hong Kong’s listings have raised just US$2.5 billion this year, data compiled by Bloomberg show. In 2021, the figure was almost US$43 billion.

Midea may potentially help change that. Marquee investors that bought into the Hong Kong offering included alternative asset manager Hillhouse Investment and Singapore sovereign wealth funds GIC Pte and Temasek Holdings Pte, Bloomberg News reported. UBS Asset Management AG was one of the cornerstone investors.

“We believe this deal could play a pivotal role in swinging the confidence levels among investors and companies to list in Hong Kong,” said Ada Li, a Bloomberg Intelligence analyst. However, it’s too early to say the Asian financial hub was turning a corner.

Other analysts share Li’s cautions and Midea could be a special case on its own. The company has been listed in Shenzhen for over a decade, meaning investors are already familiar with the company. It’s a global leader in its sector with a proven track record and the Hong Kong listing was priced at a roughly 20% discount to the Shenzhen stock price.

A bigger test, perhaps, may come if investors aren’t so quick to reach for their wallets when a new company doesn’t accept a discount to its valuation. In reality, what investors are willing to pay is still less than what many issuers are prepared to accept, leading to some companies delaying their listing plans until markets get better.

“It’s unique in that sense,” Xu said, referring to Midea. “The takeaway is that investors are still confident about Hong Kong markets and also about China’s economy, but then people are seeking a quality company and also a reasonable valuation is a key driver for the success of an IPO.”

Many Hong Kong-listed firms are undervalued, suggesting the market is close to reaching a bottom, and therefore it’s not surprising to see positive market reactions and strong demand for high-quality IPOs, said Charlie Chen, head of Asia Research at China Renaissance Securities.

“We believe investors’ sentiment in the current market still needs to be strengthened and we are happy to see more high quality companies coming to Hong Kong to bring more confidence to the market,” Chen said. 

  - Bloomberg