Korean IPOs a growing trend among Chinese small and medium enterprises

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Korea is set to lure more initial public offerings (IPOs) from Chinese small and medium enterprises (SME) due to the market’s ample liquidity, simpler application process and big appetite for “China stories”, industry observers told mergermarket.

Approximately 40 Chinese firms are believed to have mandated Korean underwriters to prepare for IPOs in Korea at present, said Perry Jung, senior manager at Xinhua Capital, a China-based investment bank owned by Xinhua Finance (TYO: 9399). Jung, who is advising on six to seven related deals, added that more than 20 Chinese companies are expected to float this year.

While Korean investment banks are putting more marketing efforts to identify underwriting opportunities, the Korea Exchange (KRX) opened an office in Beijing in 2008 to meet the increasing demand from Chinese companies seeking to be listed in Korea.

Industry sources said that the Korean bourse is enjoying the popularity among Chinese companies mainly due to the relatively quick turnaround of the Korean market after the global downturn compared to other more popular destinations for Chinese companies.

The Korea bourse is attractive to Chinese companies also because of the ample liquidity and high valuations. Korea ranked No. 2 in terms of liquidity by the World Federation of Exchanges in 2008, Jung noted.

Sectors including IT, online games, automotive, alternative energy and manufacturing are trading particularly high in Korea, while the Hong Kong market has a preference for large caps in natural resources, financial services and the consumer space. He cited 3NOD Digital [San Nuo], an electronics original equipment manufacturer (OEM) based in Shenzhen, China, as an example, saying that the company is trading at a premium to its Hong Kong-listed peers. 3NOD Digital, listed in 2007, was the first out of the nine Chinese companies currently trading in Korea.

The simpler application process is said to be another attraction of the Korean market, Jung said. Results of IPO filings are expected within two months in Korea while it could take more than two years in China. Also, the listing fees in Korea are about 70% of those of Hong Kong, he added.

In addition, according to an executive of a Chinese firm planning to list in Korea, the Korean bourse allows IPO prospectuses conducted by investment managers. This is unlike other major bourses which require such work to be carried out by lawyers and which may take a much longer time to complete.

Some Chinese companies want to be listed in Korea in order to strengthen their visibility and their relationship with Korean partners. For instance, Shenglong Solar [Sheng Long Guang Dian], a Chinese solar technology firm, chose the KOSDAQ because it has a Korean shareholder and is exploring the Korean market, as this news service previously reported.

However, there are still concerns about Chinese stocks among Korean investors. The lack of transparency and information is believed to be the biggest issue, according to industry sources. For instance, United Technology Holdings (KOSPI: 9000030), a listed, Chinese synthetic leather product maker, was asked by the Korean Stock Exchange in April 2009 to respond after its accountant - Deloitte Anjin, gave the firm a disclaimer of opinion for the inability to gather the financial records of its struggling subsidiary. United Technology Holdings responded in its statement that it would provide an expert opinion from a third party and a proposal for improvement. It was eventually able to avoid de-listing from the Korean bourse.

Despite the increase in number, it is expected that interest in the Korean exchange would be limited mostly to small and medium Chinese firms, according to industry sources. Chinese regulatory changes, which essentially restrict large Chinese corporations from listing abroad, would also makes deal sourcing difficult, they added. Unless a large sized and well-known Chinese branded firm decides to go public in Korea, the interest would remain amongst SME Chinese manufacturing firms which would otherwise have to wait for a long time to be listed on the Chinese mainland, they said.

According to a live poll conducted at a private equity conference last month in Shanghai held by Zero2IPO, a Chinese advisory boutique, 40% of fund managers are likely to exit their portfolio companies via IPOs on ChiNext, 20% in Hong Kong and 25% “overseas”, which is predominantly the US.

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