Healthcare listings in Hong Kong may slow in the short term as both the city and China grapple with the challenges of containing the new coronavirus outbreak, risk analysts and bankers said.
The medium-term outlook for IPOs in the city, however, remains intact, they said.
"The [virus] outbreak will cause a temporary delay in IPOs in Hong Kong as investors would like to wait and to have more clarity on the impact of this virus," said John Lee, UBS Global Banking's vice chairman and head of greater China.
The SARS-CoV-2 virus has infected over 70,000 people in China and killed more than 1,770 people, according to the Johns Hopkins University's Center for Systems and Science and Engineering.
Many companies in China either extended the Lunar New Year holiday that began in late January or asked employees to work from home to avoid further spread of the infectious virus.
That has affected investor meetings, IPO roadshows, due diligence efforts and other work that requires bankers and other IPO specialists to travel.
Companies with plans to list in March could consider delaying those offerings, said Jay Lee, Hong Kong-based equity analyst at investment research company Morningstar.
The virus outbreak, which began in Wuhan, China, has rapidly spread to various countries, prompting the World Health Organization to declare a global public health emergency on Jan. 31.
On Jan. 28, the Hong Kong government stopped issuing travel visas to mainland Chinese citizens and beginning Feb. 8, all travelers entering Hong Kong from mainland China have been required to undergo a mandatory quarantine for 14 days.
That is almost certainly likely to affect Hong Kong's booming IPO business as the proportion of companies from mainland China seeking to list in Hong Kong has climbed in recent years. Of the 20 healthcare companies that went public in Hong Kong in 2019, 14 were from the mainland.
"We are doing the desk-bound work, but eventually we will need to travel to complete due diligence," a Hong Kong-based banker told S&P Global Market Intelligence on condition of anonymity, adding that desk-bound activity can last for up to two to three months per deal.
The Hong Kong Stock Exchange declined to comment on Market Intelligence's inquiry about any potential impact on future listings from the outbreak.
Another, possibly bigger, worry for investors is China's dampening economic outlook, according to Singapore-based Chris Leahy, founder of risk advisory firm Blackpeak.
"It is inevitable [that Hong Kong IPOs will be affected]. China is already facing difficulties with its economy, GDP growth has slowed and the government is doing its best to address these issues. The coronavirus is not helping," he said.
China's economic growth slowed to 6.1% in 2019 amid continuing trade tensions with the U.S.
In 2020, GDP growth could slide further to 5.0%, lower than the earlier forecast of 5.7%, according to a Feb.7 report by S&P Global Ratings. The rating agency also warned that Hong Kong could suffer larger GDP reductions than China because of the size of its economy.
"Investor appetite for companies with high geographic exposure to mainland China, which encompasses most Chinese healthcare IPO candidates, might be weak," Morningstar's Lee said.
Bankers who spoke to Market Intelligence in December 2019 were positive about the outlook for healthcare listings in Hong Kong and predicted that a wider array of companies would make a public debut. Cancer drugmaker Suzhou Kintor Pharmaceuticals Inc. and Beijing Continent Pharmaceutical Co. Ltd., which makes medicines for rare diseases, are among the companies that have applied to list on the Hong Kong Stock Exchange.
In 2019, healthcare IPOs in Hong Kong — 20 in total — raised about HK$40.48 billion.
Nevertheless, the long-term standing of Hong Kong as a regional IPO hub remains intact, and investor interest in Chinese healthcare listings could potentially improve over a longer time frame, according to some experts.
The coronavirus outbreak could be a great test of whether China's rapidly growing healthcare industry is up to the challenge of developing treatments for new diseases, said Karen Andersen, Morningstar's Chicago-based biotech strategist.
"If everything goes right, I think investors could begin to see healthcare companies in a new light, improving overall sentiment," she said.
Blackpeak's Leahy also believes Hong Kong will continue to attract Chinese companies seeking to raise money from global markets, especially as there is no viable Asian alternative to listing in Hong Kong.
"Institutional investors are more likely to trust a Chinese company listed in Hong Kong than those listed in Shanghai or Shenzhen. Hong Kong is a more regulated market," he said, adding the Hong Kong stock market also offers better liquidity and price discovery than other jurisdictions, such as Singapore.
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