Ernst & Young (EY), one of the "Big Four" accounting firms in the world, said in its report released on Thursday on China's IPO market that A-share IPOs had slowed down significantly while average proceeds had increased.
"Influenced by global trade tensions and stricter scrutiny, EY estimates that 105 IPO deals in the A-share market will have been recorded in 2018, raising 138.7 billion yuan (20.2 billion U.S. dollars), with a year-on-year decrease of 76 percent by volume and a year-on-year decrease of 40 percent by proceeds," said the report.
According to the report, IPO application review process had become stricter in 2018 with a high IPO rejection rate, reaching 30 percent when compared to the previous year. The rate of IPO terminations had increased by 36 percent.
"However, the average proceeds in 2018 hit a new record since 2011. Proceeds from SME IPOs below 1 billion yuan (145.7 million U.S. dollars) accounted for 29 percent of the total, decreasing by 37 percent when compared to the previous year," said the report.
In 2018, IPOs from large companies with proceeds above 5 billion yuan (728.3 million U.S. dollars) accounted for 4 percent and 32 percent in total volume and proceeds respectively, while there were none in 2017.
Proceeds of the top 10 IPOs were at 67.4 billion yuan (9.8 billion U.S. dollars), up by 132 percent when compared with the previous year, accounting for 49 percent of the total proceeds over the year compared with 13 percent in 2017.
"By industry, technology, media and telecommunications (TMT) companies were the major players by proceeds and unicorn-related IPO activities had propelled," said the report.
By region, Jiangsu and Guangdong provinces led in both IPO deals and proceeds. "The top five regions by their number of deals were Jiangsu, Guangdong, Zhejiang, Shanghai and Beijing, collectively accounting for 69 percent of the total IPO deals," said the report.
And the top five regions by proceeds were Guangdong, Jiangsu, Beijing, Sichuan and Shanghai, together accounting for 70 percent of the total proceeds.
Regarding the A-share IPO pipeline, EY said there were 278 companies in the IPO queue for the China Securities Regulatory Commission (CSRC), representing a stiff decline from the nearly 900 companies in 2013.
"Factoring in both internal and external influences, the capital market is weakening. A more stringent IPO application review process had resulted in a higher rejection rate in 2018. Stricter scrutiny has forced companies to be more self-disciplined, which has helped ease the IPO backlog and relieved the pressure on the IPO issuing pace. " said Jane Yang, leader of EY's Greater China Government & Public Service Market Segment.
EY estimated that in 2019, the A-share IPOs are expected to flourish and new economy companies set to blossom.
The Science and Technology Innovation Board with a pilot registration system will be launched in 2019. Furthermore, the national policy of the capital market serving the real economy is believed to remain constant.
"As such, the A-share IPO activities are set to regain momentum despite their slowdown in 2018. The launch of the Science and Technology Innovation Board will increase the financing channels for technology innovation companies and enable quality businesses to grow and expand further," said the report.
The aforementioned might encourage those high-growth new economy companies, which were not eligible to be listed in the A-share market, to register in this new board, as stated in the report.
"As such, more funds will be attracted to the market, and the quality of listed companies will be enhanced. In the future, the new board will cover listed companies who are from smart manufacturing, unicorns, high-tech, advanced material and so on," said Jane Yang.
In terms of IPO reviews, EY believes their scrutiny will remain strict, which effectively controls the number of IPO applications, leaving capacity for the IPOs of the new economy to grow and improving the quality of the listed companies.
Besides, A-shares continue to enter the global financial market and are expected to attract overseas incremental funds, according to the report.