Bankers find it tough in Hong Kong's listings market
Pork producer WH's collapsed deal reflects pattern of woes in the city's listings market
It is notable that of the two initial public offerings that were supposed to have defined the year, one (WH Group) imploded in spectacular fashion and the second (HK Electric) is trading down 4 per cent from the listing price.
It is also notable that of the top 10 deals in the first half that concerned Hong Kong-listed equities, only three were initial public offerings.
The market is on track to price about US$20 billion of listings in the first half. That is not bad but is a far cry from the US$57 billion in 2010, or the US$44 billion in 2006.
A number of factors are working against the city's market. Issuers remain enthralled by bonds in a climate of low interest rates. Investors, meanwhile, are turned off by the headlines about the mainland's slowing economy.
Back in the day when the mainland routinely registered double-digit growth, investors thronged to bread-and-butter industrial plays - entities that were highly geared to the growth of the economy. Now that growth is slowing, those stocks are less appealing.
"Banks generally have lower book value while metals, mining and commodity companies in general have issues. The real estate sector has headwinds and has been focused on debt financing. So you have to take out 60 to 70 per cent of the index," said Mervyn Chow, the head of global markets solutions group in the Asia-Pacific at Credit Suisse.
What was left, he said, were technology and media firms. China is embracing e-commerce and mobile media and there are many exciting technology firms coming out of the mainland that are capturing the imagination of global investors, like Alibaba. The only problem is that many of these firms are going to the US market, like Alibaba.
This is a new and powerful trend. According to Credit Suisse, in the year to date there have been 10 Chinese technology listings in the US market raising US$3.7 billion, a threefold increase on the funds raised for all of last year.
The stocks have traded well. Brian Gu, a co-head of China investment banking at JP Morgan, said Chinese internet American depositary receipts were one of the best-performing share classes in the US market since last year.
US investors are fascinated by the immense scalability of the internet when it is applied to a giant market such as China's. This has stoked issuers' interest in doing more deals in the US.
The problem for Hong Kong is that it is not very good at technology. It lacks America's specialist funds and sprawling venture capital network. The only locally listed internet stock of any significance is Tencent Holdings.
The Hong Kong market is overwhelmingly weighted to low-technology China plays such as banks, and industrial behemoths such as Sinopec, Shenhua Coal or Anhui Conch Cement. Old-economy industrial stocks were out of favour with investors, who were also concerned about mainland banks' asset quality and shadow banking issues, Gu said.
Local bankers' problems are compounded by the rising presence of Chinese players in the Hong Kong listings market. These banks are very competitive and offer to do deals for low fees and even, it has been said, for no fees at all - just to jump on to a mandate at the last moment to grab a little league-table credit.
This is leading to situations like the decision by pork producer WH Group to appoint 29 bookrunners to its offering, which subsequently toppled under the weight of so many bankers. The previous record saw 21 banks handling last year's float of China Galaxy Securities. Hong Kong's market is competitive, almost farcically so.
Add to the hyper-competition of the banking industry the fact that deal flow is slowing and that the core product is out of favour with investors. It is just not a lot of fun to be a Hong Kong IPO banker now.
