China has seen an increase in the country’s pipeline of mergers and acquisitions (M&A), although we expect Q3 and Q4 to be even higher for dealmaking activity. The Industrial, TMT and Healthcare sectors are leading in activity, with more and more Healthcare companies planning next-round financing. A-share IPOs were not affected by the COVID-19 pandemic and maintained strong momentum. The implementation of the registration system has also accelerated the flow of A-share IPOs.
In 2020, China instituted a registration-based system for IPOs, similar to what is used in the U.S. Applied to the STAR Market and ChiNext board, the goal was to create more of a market-based approach to evaluating IPO candidates.
As Reuters reported on March 20, “The registration-based IPO system doesn’t mean looser vetting requirements,” (Yi Huiman, chairman of the China Securities Regulatory Commission said in the speech), which was published on CSRC’s website. “It means providing investors with ‘investable’ companies that have more value, so ‘requirements on gatekeepers are actually higher,’ he said.” Reuters also reported that “...since December, stock exchanges have stepped up IPO inspections, leading to a growing number of companies canceling their IPO plans.” Yi also stated that “risk is controllable, as current leverage in China’s A-share market is not excessive.”
Deal flow and IPOs
Despite these shifts, Hong Kong, along with the U.S., is still the main target for the majority of companies that plan offshore listings. Because IPO valuations are quite high at the moment, most banks are focusing the lion’s share of their resources on IPOs and group restructuring — making subsidiaries into wholly-owned companies. Deal flow in China should pick up even further with more special purpose acquisition companies (SPACs) listings. Q1 was relatively slow compared to previous years and that has spilled over into Q2.
Although M&A isn’t as high a priority at the moment, assets that can’t get listed will go straight to M&A, increasing the number of deals we’ll see close in Q3 and Q4. That’s why we anticipate these trends to push the majority of M&A activity into Q3 and Q4.
The speed of dealmaking right now is about the same as recent quarters, perhaps even a bit slower. In terms of the shakeups the business world experienced last year — new remote work processes, lockdowns, travel restrictions, etc. — China has been “back to normal” for many months now. Bankers from Hong Kong are willing to go through quarantine to travel to China for meetings, and again back home in Hong Kong. So they’re largely past the initial flurry of activity that many other regions are engaged in now.
However, the country is not without fluctuation and uncertainty. Given the COVID-19 concerns that are still present, as well as the political environment in Hong Kong, many expats and “New Hong Kongers” are leaving and trying to find positions in mainland China.
Still, TMT, Healthcare, Consumer and Industrials are all industries to watch in the region over the next quarter. We expect to see great opportunities in these sectors.
For more 2021 insights from China and other regions across the world, check out our detailed predictions in the Q3 2021 SS&C Intralinks Deal Flow Predictor. Independently verified as a highly accurate six-month forecast of merger and acquisition (M&A) activity, the SS&C Intralinks Deal Flow Predictor is compiled by tracking early-stage M&A transactions that are in preparation or have begun due diligence globally.