Denway demand sparks concern

THE huge oversubscription in the Denway Investment listing, believed to be in excess of 500 times, has prompted Mr Francis Leung Pak-to at Peregrine Capital to call for a new method for distributing new shares.

Conservative estimates from merchant banks suggest the amount attracted in the new offer in the car maker is $225 billion, compared with the $355.6 million net proceeds.

If that is correct, Mr Leung, managing director of Peregrine Capital, said the offer would be a record-breaker, both in capital absorbed and number of times oversubscribed for a new listing.

''Which ever way you look at the subscription it is record-breaking,'' he said.

Peregrine is the sponsor and a co-underwriter in the issue.

The concern expressed by Mr Leung at the huge demand for Denway shares was echoed by many leading figures in the financial world, including Commissioner of Banking David Carse, Hongkong Bank executive director Paul Selway-Swift and HSBC treasurer Chris Pavlou.

The pressure on the financial system caused by the deluge of applications for shares forced interbank money market rates up to five per cent at their peak, some 250 basis points ahead of more usual rates.

Under this strain, the Office of the Exchange Fund made two injections into the system amounting to $650 million.

Exchange Fund deputy director Norman Chan said the injections were made in two doses yesterday morning to relieve pressures on liquidity.

Mr Leung said: ''This is ridiculous. I am obviously pleased that the Denway shares are much sought-after, but my initial thoughts on this lead me to conclude we should consider looking at the offering mechanism used in PRC new listings.'' ''Under these circumstances some institutions are being squeezed out of these listings.

''We might consider changing the distribution methods to an offer for sale by tender method, as in the United Kingdom, or the offering systems used in the United States,'' Mr Leung said.

He stressed that these were his initial thoughts, but from his point of view as a merchant banker, it was important that a satisfactory institutional shareholding base for a new listing was ensured.

''People just want to stag this issue as individuals and are not interested in holding the shares for the long term,'' Mr Leung said.

Under an offer for sale tender system, investors would be asked to tender offers for shares in a new issue from a range of values offered by the merchant bank undertaking the listing.

In the Denway offer, 330 million 10-cent shares are being offered at $1.22 each.

Final figures on the level of subscription were not available last night.

A conservative estimate places the level of oversubscription in excess of 150 per cent of that achieved in the offer of China Travel International Investment shares, which was some 411 times oversubscribed, representing about $150 billion of investor money.

The market consensus is that the listing oversubscription is between 600 and 800 times. This amounts to some $241.56 billion to $322.08 billion.

In almost all cases, leading figures in the financial industry said the measures taken to secure stable money markets had worked well, but there were risks attached to such demands on the system.

Mr Carse said: ''We are uneasy about it.'' A circular was sent to banks after the China Travel oversubscription to ''make sure institutions understood the risks'', he said.

''Subscriptions seem to be getting bigger. We will have another look at the issue in order to identify and quantify the risks,'' he added.

Mr Selway-Swift said: ''Yes, there are risks.

''In my view, the amounts of money which are being subscribed for some of these issues do fall into the ridiculous category.

''I don't think it's very good for Hongkong's image as a financial centre.'' Mr Pavlou commented: ''It causes such a huge dislocation and creates a bit of tightness here and there.

''And that's why the exchange fund put in $650 million, just to ease fears that it's going to be a very tight market.'' He said the financial system had handled the pressures well.

He added: ''There are a lot of questions to be asked for sure. From an interest rate point of view, I don't think there is any problem because the banks now are pretty professional and the recycling is done well.'' Later this year the stock exchange will begin a programme of mainland enterprise listings involving nine companies.

It is being suggested that the stock exchange, which is undertaking a review of its listing rules, will look into the subject by the summer.