Smoother road seen to listings in Hong Kong after a bumpy ride this year
An erratic year for initial public offerings causes volatility in a market hurt by poorly performing mainland stocks, writes Alex Frew McMillan
It has been a schizophrenic year for the equity capital markets, with initial public offerings being pulled day after day at one moment, only for the gates to open on share offerings weeks later.
The main cause has been the intense volatility of the Hang Seng Index, which has been hurt by three years of poor performance by mainland stocks and, this year, the mainland's slowing economy.
Hong Kong was also hammered along with the rest of Asia following Ben Bernanke's announcement that the United States Federal Reserve was looking to scale back bond buying under its quantitative easing programme.
Following that shock on May 22, the Hang Seng Index fell 16 per cent, bottoming out on June 24. It took until September 19, and the surprise that the Fed did not scale back its US$85 billion monthly bond purchases, for Hong Kong stocks to recover.
"There have been a couple of false starts for the market, particularly for IPOs in Hong Kong," said Damien Brosnan, the head of the Asia equity capital markets syndicate at UBS. "You can only launch and price an IPO so quickly. Earlier this year, there were several deals that were pulled because their pricing dates were on the wrong side of that window."
It did not help that two of the year's largest offerings happened right before Bernanke made his remarks.
"The reversal of market sentiment and the effect it had on after-market price performance made it more difficult to get the next deal off the ground," Brosnan said.
Construction company Sinopec Engineering, the year's largest new offering so far, sold US$1.8 billion in shares on May 23, and China Galaxy Securities raised US$1.1 billion on May 22, both companies having priced their deals days beforehand.
At the end of September, the two stocks were below their offer price, with Sinopec down 9.5 per cent and Galaxy off 1.3 per cent.
The Galaxy listing is one of the year's largest to date, behind Sinopec and China Huishan Dairy - which happened to price its offering on September 19, the same day the Hang Seng Index passed its May peak.
The number of new listings, at 41 as of the end of September, is approaching the 46 new listings that Hong Kong attracted last year. The year-to-date value of new listings, at US$7.6 billion, also suggests the market is on track to meet last year's total of US$11.6 billion, according to Dealogic.
But those values are a far cry from the levels of 2011, when new listings raised US$35.6 billion, and the blockbuster year of 2010, with US$67.9 billion.
The Hong Kong stock exchange led the world in initial public offerings in 2009, 2010 and 2011, but fell to fourth last year and was in third place at the end of the third quarter this year, behind the New York Stock Exchange and the Nasdaq Stock Market, according to Dealogic.
Rupert Mitchell, the head of the Asia equity capital markets syndicate at Citigroup, said companies and their investment banks required four decent weeks from their prospective stock market before they could get an initial public offering off the ground. It has been hard to find such suitable windows this year.
"Ultimately, IPOs are the toughest equity transactions to get done," Mitchell said. "They become increasingly tough to get done at times of heightened volatility, and we have had that in bucket loads this year."
It has not just been the performance of the markets that has put companies off going public or launching secondary offerings. There has also been a reluctance among executives to list at a time they feel their company will not be able to command the right pricing.
"For chief executives and chairmen, their expectations are too high - I don't think vendors are that keen at current prices to list," said Sam le Cornu, a senior portfolio manager for Asia-Pacific equities at Macquarie.
"There are a lot of deals here in the pipeline waiting for a rally. And there are a lot of hungry equity capital markets teams out there to do the deals."
There have also been fewer public companies looking to issue stock or convertible bonds. With interest rates at record lows, it has been very attractive to issue debt instead of equity.
"There have been several periods in 2013 where issuers could have got equity deals done, but the supply wasn't there," Brosnan said.
While the pace of initial share sales may be on track to meet last year's total, there has been a dramatic slowdown in total equity capital markets volume, when you include secondary offerings.
Until September, there had been 276 equity offerings in Hong Kong, raising a total of US$32.6 billion. That is just over half the US$60.2 billion raised last year from 330 deals, and one quarter of the record US$134.8 billion in 2010, when there were 533 share sales.
Investors have been loath to commit themselves to the six-month lock-up period required for cornerstone investors. So companies turned to other sources, from debt, private equity or joint-venture partnerships, capital markets professionals said.
There was also something of a shift from north Asia to Southeast Asia, following exceptionally strong performance in markets such as Indonesia, Thailand and the Philippines last year.
That may reverse itself once the Federal Reserve does begin its tapering, which is expected to see capital based on cheap lending exit emerging markets and return to developed Europe and the US.
Although the Fed has not slowed its purchases, some emerging markets have already been hit hard.
The Indonesian rupiah lost 15 per cent between May and the middle of September, hurting performance for international investors who repatriate proceeds from share sales. Indonesian stocks fell 29 per cent between May 22 and the end of September.
Investors may also give Hong Kong a second look with rosier forecasts for mainland China's growth encouraging a mainland stock market rally.
After sinking 14 per cent in June, the Shanghai Composite Index has rebounded to cut the loss to about 7 per cent.
The International Monetary Fund is forecasting China to avoid a slowdown in the second half of the year and see its gross domestic product rise 7.5 per cent for the year, in line with Beijing's own target.
China's leadership is also pushing for structural reform that would see the country's reliance on exports fall in favour of stronger domestic consumption. That could encourage more listings of consumer-focused companies such as Huishan Dairy.
September saw two of the largest offerings of the year, with Huishan Dairy and food and drink merchant Tenwow International getting their public offerings off the ground.
That encourages equity capital markets professionals to predict that more Chinese consumer companies will launch deals. Investors may also favour the technology, media and telecommunications sector, also largely driven by consumer spending and advertising.
"People have been underweight Hong Kong and China," said le Cornu, who is overweight both markets, adding that listings would continue if the Hang Seng Index maintained a level at 23,000 points.
"As people buy back into Hong Kong and [mainland] China, you'll see more demand."