Regarding the hot Hong Kong stock IPOs, Goldman Sachs has prepared a Q&A summary

In the first half of 2025, the strong recovery momentum of the Hong Kong IPO market is noteworthy.

According to news from the Chasing Wind Trading Desk, Goldman Sachs analysts Si Fu and others stated in a research report on July 16 that the Hong Kong IPO market is experiencing a significant recovery, with 51 companies listed so far this year, raising HKD 124 billion, and over 200 companies waiting in line. The report also analyzed and interpreted some common questions.

Goldman Sachs indicated that this recovery is primarily driven by factors such as strong market performance reigniting corporate financing interest, the Hong Kong Stock Exchange adopting more relaxed listing rules, and regulatory support for dual listings. Foreign capital accounts for the highest proportion among cornerstone investors, and the participation of global long-term investors has also increased.

Looking ahead, Goldman Sachs expects that the active Hong Kong IPO market will significantly enhance market sentiment, combined with a low interest rate environment and the return of global funds providing liquidity support. It is anticipated that the performance of IPOs will continue to improve, with companies where cornerstone investors hold 30%-50% performing stronger, as growth potential is a key driver, and the A-share market, especially industry peers, is also expected to benefit.

Why is the Hong Kong IPO market active?

The recovery of the Hong Kong IPO market stems from multiple factors.

Goldman Sachs emphasized that firstly, the market rebound has ignited corporate financing interest. The Hang Seng Index performed its best in ten years in the first half of the year, benefiting from a policy shift, optimistic sentiment around AI, and easing tensions between China and the U.S.

At the same time, the optimization of Hong Kong Stock Exchange rules has enhanced attractiveness, facilitating high-quality companies to go public and driving market activity.

Goldman Sachs listed some rule optimizations in the report, such as shortening the general application time limit to 40 working days in October 2024, and to 30 working days for A-share companies; launching a technology company channel in May 2025 to support confidential filing and non-equivalent voting rights structures; and optimizing pricing and public market requirements in December 2024.

Why are A-share companies and ADRs seeking dual listings?

Firstly, it is due to the active promotion by regulatory authorities. In April last year, the China Securities Regulatory Commission issued five measures for cooperation with Hong Kong in the capital market, explicitly mentioning the need to "support leading enterprises in the mainland to list in Hong Kong."

In May this year, CSRC Chairman Wu Qing also stated the need to streamline and optimize the overseas listing filing mechanism, processes, and related elements to improve the quality and efficiency of overseas listing filings. There is strong support for building the Shanghai International Financial Center and consolidating and enhancing Hong Kong's status as an international financial center.

Secondly, A-share companies are seeking internationalization. The report states that under the trend of "going global," A-share companies are establishing offshore equity financing channels through listing in Hong Kong to attract overseas investment, support business expansion and management incentive plans, while also enhancing international visibility.

Finally, ADR companies are alleviating delisting risks through dual listings. Goldman Sachs data shows that about 80% of ADR institutional investors have entered the Hong Kong market. In the event of a delisting, trading can be smoothly transferred. A dual primary listing can access southbound funds, while a non-primary listing enjoys exclusivity.

Is it sentiment boosting or liquidity extraction?

Goldman Sachs believes that active IPOs enhance market sentiment, which is positively correlated with index trends and trading speed. Companies tend to finance during high valuation periods to attract attention and strengthen confidence. This year's fundraising amounts account for less than 1% of total market capitalization and trading, and the net issuance amount after buybacks is even smaller, indicating limited liquidity impact The low interest rate environment supports participation. Goldman Sachs pointed out that at the beginning of May, the Hong Kong dollar exchange rate reached the lower limit of 7.75, and the intervention by the Hong Kong Monetary Authority led to a significant drop in short-term Hong Kong dollar interest rates. The historical ample liquidity accompanied by rising valuations reduces borrowing costs and encourages IPO investments. Global funds are flowing out of U.S. bonds and stocks, shifting towards reasonably valued Hong Kong stocks with strong growth potential.

Historical data shows that large IPOs have a short-term impact on the market. According to Goldman Sachs' research on the 50 largest IPOs, the market index slightly declined before the IPO but quickly rebounded, with a surge on the first day of the IPO. Strong inflows from southbound and active funds indicate an improvement in marginal risk appetite.

Who is participating in these IPOs?

The report shows that Hong Kong IPOs attract a diverse range of investors, including hedge funds, mutual funds, pension funds, sovereign funds, and retail investors.

Goldman Sachs data indicates that year-to-date, cornerstone investors have subscribed to 42% of the total fundraising amount, with two-thirds coming from foreign investors. Global long-term investors (including pension and sovereign wealth funds) have increased their participation after a period of reduced allocation to Chinese stocks.

Retail interest has reached a multi-year high. Goldman Sachs noted that this year, the demand-supply ratio averages 9%, lower than the 25% of the past five years, reflecting an improvement in public risk appetite.

Factors affecting future market performance

Goldman Sachs analyzes that the average first-day return for Hong Kong stock IPOs in 2024-2025 is 10%, 17% in the first month, and 41% within three months, far exceeding the 10%, 11%, and 10% of the previous five years.

The report points out that the proportion of cornerstone investors' holdings is key. Historical data shows that companies with cornerstone holdings of 30%-50% perform best after their IPOs. The size of the company has little impact on return differences, but companies with higher growth potential tend to achieve higher returns, even with higher valuations.

Spillover effects on A-shares and industry peers

Active Hong Kong IPOs positively impact the A-share market. Historical data from Goldman Sachs shows that when Hong Kong IPOs are active, the A-share market often performs well. Despite competition for funds, historical data indicates that strong Hong Kong IPO activity does not negatively affect A-share market returns or trading volume.

Industry peers also benefit in the short term. The report shows that industries with newly listed companies in Hong Kong typically outperform the market in the following week. Among the 11 MSCI China industries, 8 achieved positive relative returns in the week following their peers' listings, but this effect is usually short-lived and gradually fades over the following month.

Impact on index inclusion and southbound funds

Goldman Sachs estimates that approximately $134 billion in passive funds track MSCI benchmark indices that include Chinese stocks, with $28 billion and $24 billion tracking the Hang Seng Index and Hang Seng TECH Index, respectively.

The report predicts that newly listed companies meeting certain market capitalization and liquidity requirements can be quickly included in the index after 10 trading days.

Major listed stocks can access southbound funds. Goldman Sachs pointed out that major listings (rather than secondary listings) can be included in southbound trading once they meet the criteria, and historical evidence shows that southbound buying can sustain for several months. Eleven dual primary listed ADRs have already been included in southbound trading, with the southbound holding ratio increasing to 7%-16% within a year of inclusion

What is the investment impact?

Goldman Sachs believes that the market recovery is favorable for the growth of the Hong Kong Stock Exchange and Chinese offshore brokers. New stocks in popular sectors such as consumer, healthcare, and technology are in higher demand, with the latter performing best this year, and consumer stocks yielding the highest returns after March.

Dual-listed stocks have a strong outlook, with their A-shares and ADRs also providing returns. Goldman Sachs has selected 20 high-quality A-shares in its report, which have announced plans to list in Hong Kong, demonstrating good earnings growth (2024-26 EPS compound growth rate >10%), reasonable valuations (PEG <2 times), and a high proportion of foreign ownership (>2%)