Asian IPOs: singing the blues (except in Thailand)

Investors are unplugging from the primary market following poor secondary market performance. Will Tencent Music entice them back?

Institutional investors are becoming increasingly selective about initial public offerings from Asia following a string of poorly performing deals, over which they have been unable to exert much pricing influence.

One such fund manager is Damien Brosnan, the former UBS Asian equity syndicate head who jumped over to the buy-side a year ago, becoming a portfolio manager for Maven Investment Partners.

"The primary markets have become challenging over the past few months," he told FinanceAsia. "It's, therefore, critical to be actively engaged across more deals to get a good handle on which ones are working and which ones aren't."

He sees little change in the run-up to the year-end as investors try to protect their returns against issuers, which are still in the process of re-setting their valuation expectations.

It is a viewpoint backed up by Johnson Chui, head of Asia Pacific equity capital markets at Credit Suisse.

“There’s a big divide between the secondary market, where there’s been positive momentum over the past quarter, and the primary market where a majority of IPOs have traded down, particularly in Hong Kong,” he said. “As a result, investor selectivity has been increasing and there’s been a stronger bias towards larger, more liquid transactions.”

Both Brosnan and Chui note how subdued retail sentiment has been in Hong Kong. “I think it could be described as lukewarm at best,” said Brosnan. “And as Hong Kong interest rates go up, we think that retail investors will increasingly wonder whether equities are the best place to park their cash.

“Right now the most important investment driver is market psychology rather than company fundamentals," he reiterated. "It’s really important to work out how different types of investors are behaving across individual Asian IPO markets.”


Two IPOs, which vividly demonstrate how the pricing dynamic can be affected by this process in action, are Hong Kong’s Haidilao and Thailand’s Osotspa.

Both represent the kind of consumer plays that retail and institutional investors typically love: a hot pot restaurant chain and an energy drink manufacturer.

But that is where the comparison ends.

Haidilao priced its HK$7.55 billion ($967 million) IPO at HK$17.8 per share; the top of its IPO range in mid-September. In doing so, it secured a valuation of 30.2 times forecast 2019 earnings.

One year ago, when retail momentum was strong, such a deal would likely have secured multiple clawbacks. This time round, the retail book closed 5.5 times covered and the IPO had a lacklustre trading debut.

On Thursday it closed just below its IPO price at HK$17.66 per share, having traded as low as HK$15.98 in late September.

Over in Thailand, Osotspa was pre-marketed on a similar valuation to Haidilao. Observers report, however, that unlike Hong Kong, local institutional investors hold a lot more pricing power and have managed to keep the valuation in check.

Consequently, lead managers Bank of America Merrill Lynch, Bualuang, JP Morgan and Phatra went out with a formal indicative range of 19.7 to 22.4 times forecast 2019 earnings.

The deal is expected to price at the top of this range on Friday (October 5) raising Bt15.1 billion ($465 million). More importantly, it is also expected to trade up, creating positive momentum for the market and IPO pipeline. 

Investment bankers have responded to investor concerns by trying to de-risk transactions. Chui notes that this is far easier in the US, which does not set minimum levels for the amount of equity that companies have to issue.

Chinese tech companies Qutoutiao and X Financial both took this path in September and cut their deal sizes back from the standard 15% to 20% to 7.2% and 4.8% respectively. Unfortunately it did not help either IPO stay above water in the secondary market.


The question on most investors’ minds is whether the forthcoming listing of Tencent Music Entertainment will follow suit. China’s dominant music streaming company submitted an SEC filing on October 2 under the lead of Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley.

The share prices of all three members of the BAT troika (Baidu, Alibaba, Tencent) plus their offshoots, as well as contenders such as, have endured a torrid year for a variety of reasons - financial and political - which make their valuations harder than usual to quantify.

Tencent Music, for example, has been allowed to carve out a dominant position for itself in China. Its top three music apps (Kugou Music, QQMusic and Kuwo Music) held a 65% combined market share during the first quarter in terms of monthly active users according to iResearch figures.

This has enabled Tencent to record spectacular growth figures and to outperform analyst estimates. For example, its first half revenue growth was up 92% year-on-year to Rmb8.619 billion ($1.27 billion).

One key issue for investors is how to balance that against the potential for regulatory change. Analysts also have vastly differing opinions about the right valuation for Tencent Music’s nearest peer, Spotify, which listed on the New York Stock Exchange in early April at $132 per share.

Price targets vary from lows of $124 (Morningstar) to highs of $225 (JP Morgan and Morgan Stanley) versus a current share price $175.

Bulls believe that music streaming is a secular growth story, while bears think that Spotify is at risk from tech giants such as Apple and Google, which can run their music services as loss leaders. At the end of the first quarter, the company had a 19% US market share compared to 20% for Apple according to iResearch data.

Unlike Tencent Music, Spotify is not yet profitable. On a price-to-sales basis, it is currently trading at 6.06 times 12 months revenues to June 2018.

If Tencent Music priced at the same level it would have a valuation of $13.36 billion based on 12-month sales to June 2018 of Rmb15.115 billion ($2.206 billion).

This would represent a premium to the roughly $12.6 billion valuation it achieved in March when it sold 52.024 million shares to a group of funds for $209.98 million.

A number of financial analysts, however, believe that it should be valued at a much higher level thanks to its superior growth as well as the monetization of its user base.

For example, in late May Goldman Sachs valued the company at 13.9 times forecast 2018 sales. That equates to a valuation around the $30 billion mark. 

A few months later, Jefferies valued it at the same level. 

Tencent is coming to a US equity market, which has enjoyed strong outperformance relative to the rest of the world.

Yet this does not appear to have helped recent Chinese listings on the NYSE and Nasdaq. All of September’s $100 million plus deals are trading below their issue price with the exception of Chinese car company, NIO.

Bankers note, however, that the overall IPO market is far less crowded than the fourth quarter of 2017 when multiple issuers were trying to take advantage of market momentum.

“The fourth quarter is normally the most active of the year,” concluded Credit Suisse’s Chui. “But this year, the strong activity was during the first half as the momentum carried over.”

But he added that there has been a pick up following the summer break. "The market window remains open and we expect much of the deal flow to be driven by new economy and private sector companies," he added.

It remains to be seen whether this will translate into returns for investors, but the year's activity to date has certainly boosted the league tables for investment bankers.

Dealogic data shows that Chinese IPO volumes (mainland and international exchanges) have already surpassed 2017’s total, with $52.23 billion raised between January and the end of September compared to $45.98 billion for the whole of 2017.


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