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February 21, 2013 11:26 am
On the face of it, Hong Kong’s market for new equity listings has perked up. Deal volume in the year to date is at its highest since 2010, while retail investors have finally returned. But, with many of the recent deals faring poorly in secondary trading, and China’s equity rally losing steam, the market for new offerings may stall before it gets out of first gear.
So far this year, Hong Kong has seen six deals, which have together raised $788m, compared with $452m by this time last year and $256m in 2011, according to Dealogic. Retail activity has also picked up, with heavy oversubscription in a number of this year’s offerings.
Hong Kong was the world’s top listing venue in 2009, 2010 and 2011. But last year it sank to fourth in the global rankings, only narrowly edging out Kuala Lumpur, the Malaysian capital, amid concerns about the Chinese economy.
“However you want to look at it, 2012 was a bad year. A lot of companies that couldn’t list last year, we expect them to come back and try again”, says Paul Lau, partner at KPMG China, who forecasts IPO volumes to reach $16.1bn in 2013, up from $11.4bn in 2012.
Most already see signs of improvement.
“The IPO market will be more active now that [Chinese] new year is behind us,” says Jeff Zajkowski, head of Asia Pacific equity capital markets at JPMorgan. “The second quarter is going to be pretty good.”
There are two sizeable Hong Kong deals in the works. Chinese brokerage Galaxy Securities is planning to raise around $1.5bn, while oil company Sinopec aims to list its engineering unit for a similar amount. Both deals are expected to go to market before June, and their performance is likely to be seen as a litmus test.
Meanwhile, bigger deals are getting away elsewhere in Asia. Mapletree is due to list a China-related real estate investment trust in Singapore, which is tipped to raise around $1.3bn. Bankers see the Mapletree listing as an important boost to Asia’s IPO market, which could provide a catalyst for similar deals in Hong Kong.
In Indonesia, CVC-backed Matahari is preparing a share placement – which will in effect serve as a re-IPO due to the tiny existing float of shares on the Jakarta exchange – that could raise up to $1.5bn.
The last big deal in the region, PICC’s $3.1bn debut in December, has since risen 24 per cent, providing a further boost to sentiment.
Issuers now “feel comfortable doing a deal” and are more confident of success, says Damien Brosnan, head of Asia equity syndicate at UBS. Instead, their focus has shifted to timing, and how – amid rallying markets – to achieve the best price.
This “wait and see” mentality, and the upcoming earnings season, go some way to explaining why new IPO applications have failed to materialise in the days following Chinese new year.
Global uncertainties, such as the selection of a new Bank of Japan governor and the US sequestration, may also have given potential issuers cause to hold fire, says Rupert Mitchell, head of equity syndicate at Citi.
But there are other factors that could further delay the hoped-for rebound in activity.
Though retail investors have returned to the market, they have not been well rewarded. Of the six deals to take place so far this year in Hong Kong, only one – the $104m listing of Time Watch – is still above its issue price. The others range from a fall of 4 per cent, to a dive of more than 30 per cent.
“People will pile into deals when the risk-on button is on,” says one banker. “Everyone is ready to hit the risk-off button in a hurry.”
Concerns are also mounting that the Chinese equity rally is running aground. Following a 2.2 per cent slide on Thursday, the Hang Seng China enterprises index – mainland companies listed in Hong Kong – is now in negative territory for the year, having risen 27 per cent from last September to the end of 2012.
“There are a number of issuers in the wings waiting to come to Hong Kong,” says Alexis Adamczyk, co-head of equity capital markets for Asia Pacific at HSBC. “The next two months are going to be important. We need the Hong Kong market to be supportive to push these deals through.”
One hopeful sign is the increasing interest in equities from private banking clients, who were heavily biased towards fixed income last year. In recent weeks such investors have been looking to commit new money to stocks, which could provide support to the IPO market.
“It’s not a flood yet, but it is a noticeable change. The clear trend is for inflows into equity,” said Mr Zajkowski.
Longer term, there are a number of supportive factors. The mainland Chinese equity market remains closed to new listings, despite a backlog of more than 800 companies. China’s regulators have been loosening restrictions in order to make it easier for mainland companies to seek overseas listings. Much of that business is expected to come to Hong Kong.
“We’re seeing more and more IPO inquiries from Chinese companies looking to list in Hong Kong”, says Mr Lau, including some that had previously sought a Shanghai listing.
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