Asia ex-Japan ECM: Seeing a clearer sky

Halfway through 2017, FinanceAsia looks at equity capital markets across Asia and examines the factors behind the revival in deal volumes and whether it can continue.

Asia ex-Japan share sales rebounded in the first half of 2017 as the region gradually shrugged off the political uncertainties in the US and Europe, prompting capital to flow back into the region’s stock markets after a catastrophic 2016.

Total equity deal volume grew by 16% to $46.7 billion in the first six months of the year compared with $40 billion in the same period of 2016, the lowest level since 2003, according to data from Dealogic. This figure does not include A-shares, which are still largely unaccessible to international funds.

Bankers expect the improved momentum to continue in the second half of the year, with a number of jumbo initial public offerings, including the $1.9 billion floatation of NetLink NBN Trust, set to close in early July. These could potentially add several billions to the year’s total ECM volume before the market enters the typically quiet months of August and September.

International money is flowing back to Asian ECMs after the fallout from Britain's vote to leave the European Union and the election of Donald Trump as US president kept many investors on the sidelines.

Also helping, equity bankers say, is clearer guidance from the Federal Reserve on the likely future path of US interest rates.

The improved investor sentiment is reflected in stock market indices across the region. Hong Kong and South Korea are the top gainers, having rallied by 18% year-to-date; India is up 17%, while most Southeast Asian markets are up at least 7% since the beginning of the year.

“The overall market backdrop has improved significantly from a year earlier,” Aaron Arth, Asia ex-Japan head of Financing Group at Goldman Sachs, told FinanceAsia. “Many global investors that shied away from Asia last year are now more willing to allocate capital to the region.”

Goldman Sachs was the top equity dealmaker in Asia ex-Japan in the first half, helping 18 clients to raise a total of $4.2 billion for a 9% market share. In particular, Goldman Sachs advised PCCW on its $1.1 billion block sale of HKT Trust, the largest and the only billion-dollar block trade of the region in the first half.

Block trade revival

The uptick in block trade activities is a key component of the region's ECM revival. “In general, we see issuance momentum strengthening significantly compared with the first half of 2016. This is largely driven by robust block trade activity,” Arth said.

Secondary share sales in Asia rose by 63% to $29.7 billion in the first six months compared with $18.2 billion in the same period last year, Dealogic data shows. There were 367 deals priced during the period, an increase of 20% compared with 305 deals last year.

Existing shareholders have shown a desire to cash out their shareholdings as regional equities continue to rally throughout the first half. On the buyside, investors became more bullish on follow-on offerings after a number block deals delivered good returns at the beginning of the year.

While first-half ECM volumes are still some way behind the activity levels recorded over the rest of the decade, when it averaged about $60 billion  – least of all the first six months of 2015, when $95 billion of business was recorded – the region’s ECM market appears to be on the right track.

One positive sign is the return of primary share sales – companies raising capital by issuing new shares.

New share sales were relatively insignificant in the past two years, since issuers were reluctant to sell equity at a low price amid market volatility. At the same time, most companies are able to find cheap debt financing as interest rates continued to be under pressure in most parts of the region.

The revival in new share sales shows that Asia's ECM is gradually restoring its primary function as a fundraising venue for companies looking to list publicly, rather than as just a marketplace for existing stockholders to exchange shares.

Some of the primary share deals in the first half include Anta Sports’ $488 million top-up placement, Maxis’ $387 million deal and Fosun Pharma’s $296 million H-share placement.

It is too early to tell how long that strong flow of primary placements will persist but Asia’s ECM market should be well supported by a number of sizable IPOs going into the second half.

Some of the confirmed deals include Celltrion Healthcare, which is set to kick off an international roadshow for its $881 million Korea IPO on Monday. There is also Zhongyuan Bank, the largest city commercial bank in China’s Henan province, which started building its books for a $1.1 billion Hong Kong IPO on Friday.

And there is potentially far bigger deals still to come.

China Tower, the country’s state-owned telecom tower company, is expected to raise $10 billion from a mega IPO in Hong Kong towards the end of the year. China Petroleum & Chemical Corp is also planning to revive a $10 billion IPO for its retail business Sinopec Marketing later this year, which was postponed in 2015 partially because of the group’s internal restructuring and low crude oil prices.

“Going into the second half, we expect IPO activity to pick up, especially towards the end of the year,” Goldman's Arth said.

Asia (ex Japan) ECM Bookrunner Rankings - 2017 YTD
Pos. Bookrunner Deal Value ($m) No. %share
1 Goldman Sachs 4,185 18 9.00
2 Citi 2,928 20 6.30
3 Morgan Stanley 2,860 19 6.15
4 Bank of America Merrill Lynch 2,205 13 4.74
5 UBS 1,389 12 2.99
6 JPMorgan 1,306 7 2.81
7 Korea Investment & Securities 1,270 11 2.73
8 Deutsche Bank 1,117 9 2.40
9 NH Investment & Securities 1,114 12 2.30
10 Credit Suisse 1,071 10 1.92
Dealogic data as of June 30, 2017. Excludes A-shares
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