April showers but Xiaomi offers sunnier ECM days ahead

Volatility takes its toll across Asia during April, but falling markets open up valuations, giving hope for May’s strong equity capital markets pipeline.

A combination of global volatility, public holidays and first quarter earnings results put paid to high equity capital markets activity from Asia during April. But market participants believe the month will remain the exception to the rule during 2018 as valuations become more compelling and a strong pipeline starts to unfold, led by Xiaomi’s blockbuster initial public offering.

During April, equity markets had to grapple with two big and ongoing global issues: escalating trade tensions between China and the US and an uptick in Treasury yields past the psychological 3% mark. This resulted in narrower issuance windows and far greater pricing sensitivity from investors, leading to a number of failed deals in Singapore and South Korea.

It was perhaps telling that while Asia ex-China recorded its second best month of the year in issuance terms overall (raising $5.878 billion according to Dealogic figures), two of the five largest IPOs were less than $100 million in size.

The China universe (including A-shares) also recorded its second worst month so far this year. Dealogic figures show that issuance amounted to just $9.6 billion from 43 deals, led by Ping An Healthcare’s $1.18 billion Hong Kong IPO, compared to $22.027 billion from 52 deals in March.

But within a few months, Xiaomi will change all that after filing for its Hong Kong listing on Thursday via CLSA, Goldman Sachs and Morgan Stanley.

The mobile phone operator’s mooted $10 billion deal is likely to rank as the largest flotation from the region since Alibaba listed in New York 2014. More importantly, it will also be the first to deploy a dual class shareholding structure under new rules unveiled by Hong Kong Exchanges and Clearing in April.

As Alex Abagian, head of Asia Pacific equity syndicate at Morgan Stanley, commented: “This continues to be one of the best pipelines in terms of volume quality that we’ve seen in some years for Hong Kong. That’s partly because recent regulatory changes will encourage many new economy companies, particularly in the technology and biotech sectors, which historically would have chosen New York as a listing venue.”

Xiaomi’s ability to choose Hong Kong combined with Wuxi AppTec’s recent experience in Shanghai, provide compelling evidence why it would be foolish to write-off the territory as Asia’s premier listing venue any time soon. In the recent past, Xiaomi’s main option would have been New York where dual class structures are already allowed.

This is where Wuxi PharmaTech was traded until it went private in 2015. Since then it has split itself apart, spinning off Wuxi Biologics in Hong Kong last summer and then Wuxi AppTech in Shanghai this April.

But choosing its home market without being able to use a backdoor listing, meant it had to abide by the China IPO market’s 23 times earnings cap at a time when pharma companies were trading at much higher levels. It was a strategic decision, which cost the company dear in terms of the amount of capital it was able to raise over the near-term.

And as Abagian noted: “The world’s biggest growth funds want to invest in companies listed on international markets and that won’t change any time soon unless China allows direct investment into its equity markets in a complete, open way as opposed to exclusively via the Stock Connect platform.”

The main variable for the tech-heavy IPO pipeline is what direction valuations are heading in after a sharp one-and-a-half month sell-off. Global tech stocks underperformed global equities by 5.3% to their April 25 low.

Suresh Tantia, investment strategist in Credit Suisse’s Asia Pacific CIO office, told FinanceAsia that the strong IPO pipeline could raise near term concerns about the valuations of listed tech companies. But he believes the impact should be limited "given the strong fundamental story of existing stocks".

He also argues the pullback means the sector is well placed to outperform the wider market. He highlights that tech is trading only slightly above its ex-bubble average relative to global equities.

“The technology sector is the third cheapest if we adjust earnings multiples for the long-term growth outlook,” he commented. “On the earnings front, global technology stocks are expected to deliver EPS growth in excess of 20% in 2018, which is very encouraging.”

Across Asia, stock market indices have also moved back through, or are close to their five-year averages. A number of investors and strategists, including Tantia, believe this also bodes well for the future.

“We believe Asian economies are still at the mid-stage of the economic cycle,” he commented. “As such, the investment case for Asian equities remains constructive, on the back of rising ROEs, strong earnings growth and reasonably attractive valuations.”

He concluded that consensus expectations for 14.2% earnings growth for Asian equities as a whole in 2018 appear “realistic if not conservative".

VIETNAM’S STAR BILLING

Away from China, activity has been much healthier largely thanks to Vietnam, whose companies not only feature in April’s top five IPO rankings, but also those for follow-ons and convertibles as well. It is a situation few market participants would have predicted even as recently as six months ago, underscoring just how rapidly the market there is developing.

In April, activity was led by Techcombank’s $923 million IPO and No Va Land’s combined $150 million top-up placement and $160 million convertible.

“Vietnam has definitely been flavour of the month,” Abagian commented. “The macro story there is so strong that investors have just been ignoring volatility across the region to a large extent.”

Syndicate bankers all say investors are participating in primary market deals as an efficient way to gain sizeable exposure in a market where secondary liquidity is still thin. They also say order book composition is changing rapidly.

“This is no longer a market for a small number of new frontier funds,” Abagian continued. "We’re now seeing broad traction from the global emerging market community both across long only and alternative asset managers.

“For certain Vietnamese deals, participation is not dissimilar to what we’ve seen in some of the largest and highest quality IPOs across the region,” he explained.

INDONESIA AND PHILIPPINES BUFFETTED

As Vietnam marches up the ECM rankings, other countries continue to struggle.

In particular, Singapore’s efforts to stake its claim as an international listing venue were not helped when Bangladesh’s Summit Power pulled its roughly $202 million IPO in April due to insufficient demand at the right price point. So too, Qualitas Medical postponed a roughly $100 million Singapore IPO that it had previously pulled from Malaysia as well.

In the Philippines, Del Monte also deferred a preferential share offering thanks to falling markets compounded by the impact of heavy rights issuance led by banks such as Metrobank, which raised $566 million in April.

The Philippines’ stock market ranks as Asia’s worst performing so far this year. The Composite Index is down 9.6% to Wednesday’s close, while the MSCI Philippines Index has performed even worse, down 13.1%.

Richard Taylor, head of equity capital markets and corporate finance at CLSA, agreed that global volatility made ECM activity challenging in some markets during April. “As soon as US Treasury yields went through 3%, countries with budget deficits like Indonesia and the Philippines were hit as dollar-funded carry trades were reduced,” he said.

CLSA was one of the lead managers for all three of the $50 million-plus IPOs, which came from Indonesia over the course of the month. A further four are at different stages of the marketing process.

Jakarta-based bankers said that issuers have become bunched up because they are all trying to list during the first half of the year, conscious of next April’s general election. Of April's trio, two were particularly unlucky since their pricing dates coincided with the four trading days when the Jakarta Composite Index plunged 6.33%.

Consequently, hospital operator Medikaloka Hermina and sanitary ware manufacturer Surya Pertiwi both priced their respective Rp1.96 trillion ($141 million) and Rp1.25 trillion ($90 million) IPOs at the bottom of their indicative price ranges. Only BTPN Syariah was able to move investors up the valuation range, raising Rp751 billion ($55 million) at Rp975 per share, as it had come when markets were a little more settled the week before. 

“We encourage issuers to be more flexible about how they set their price range in a risk-off environment and in particular not to set the bottom end too high otherwise investors will be discouraged from engaging in any valuation work,” Taylor stated. “It’s a strategy, which makes it much easier to build some momentum in the order book.”

Having worked in Asian ECM for more than two decades, Taylor is one of the market’s most experienced bankers and dealt with all its ups and downs. He too, believes that even the harder hit Asean [Association of Southeast Asian Nations] countries will continue to thrive.

“Investors are prepared to engage if it’s the right company at the right valuation,” he concluded. “But they are more sensitive and more selective in the current market.”

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