Bankers forecast strong second half for equity issuance amid stabilising markets

ICBC's IPO, the timing of Indian issuers' return to the market and the fight for high-profile mandates out of China, Korea, Malaysia and Singapore seen in focus in coming months.
With a record six months just behind them and back-ended pipelines bulging with potential new equity issues, Asian ECM bankers are exuding confidence that the secondary markets will come away from the recent correction in good enough shape to allow for a strong second half.

In the first half, total equity issuance in Asia ex-Japan amounted to $55.9 billion, which is up 55% from the same period last year and already 60% on the way to match the $94.5 billion raised during 2005 as a whole.

Essentially, the planned fourth quarter listing of Industrial and Commercial Bank of China, which could be the worldÆs third largest IPO ever, should ensure the primary issuance volume gets close to last yearÆs, while an expected string of mid-sized deals out of China and India has the power to bring another record year.

The visibility in the rest of the region is less clear, but once the markets stabilise, a number of high-profile issuers are seen ready to sound out banks to help them raise fresh capital, while government sell-downs in South Korea and Taiwan could also help boost volumes.

Taiwan's Chunghwa Telecom could be first out after the government confirmed last week that it will sell a 7.37% stake in the company. The Taiwanese government, which holds just over 41% in the telecom operator, didnÆt comment on the timing of the sale, but it has previously shown a liking for selling Chunghwa Telecom stock in August ahead of the dividend payment date. The deal, which could be worth as much as $1.2 billion based on the current market price, has yet to be mandated.

The sharp sell-off in global equity markets that began in the second week of May meant the primary markets stalled to a virtual trickle in the final six weeks resulting in several deals being either postponed or downsized to accommodate a valuation low enough to draw sufficient demand.

Most of the deals that were put on hold or cancelled because of insufficient demand as a result of that correction are expected to return to the market in the second half û perhaps with the exception of some of the more opportunistic Hong Kong REITs - adding further to the already heavy pipeline.

Indeed, ProMos Technology which pulled a GDR issue in mid-June and Cambridge Industrial Trust, which called off its Singapore IPO at around the same time, have already returned successfully with somewhat revised deals in the past couple of weeks.

Mainland property developer Shui On Land, which pulled a close to $1 billion IPO the day before the bookbuilding ended, is expected back in September with several bankers noting that the company had been unlucky in terms of timing and shouldnÆt have any problem to sell its story in a more stable market environment.

However, bankers and analysts alike argue that it will take some time yet to rebuild the confidence and the risk appetite that û together with a hefty chunk of capital value û was lost back in May and June.

FinanceAsiaÆs FA100 index, which tracks 100 of the most profitable bluechips in Asia outside Japan, has bounced about 6% from its lows in mid-June to Friday's (July 14) close of 1,404 points, but is still 13.7% below its all-time peak of 1,627 points that was reched on May 8.

"We have had extreme volatility with markets like India seeing volatility levels rise to almost 55-60% and other markets witnessing enhanced volatility levels as well. ThatÆs scary and nobody wants to commit money in that kind of environment," says Gokul Laroia, head of global capital markets for Asia Pacific at Morgan Stanley.

"So, we need to see some stability return to the markets. If they can go up between 3% and 5% over the next month with somewhat reduced volatility and a data flow that is not extreme, I think people will start committing again. A lot of liquidity has come into (funds focusing on) the Asian markets and that liquidity needs to find a home as these guys are not paid to sit on cash," he adds.

And he isnÆt alone. Most bankers do believe July and August will be fairly quiet due to the traditional summer breaks, but expect - based on their own individual pipelines û that the September to November period will bring a steady stream of new issues.

The Big Deals

Just like Bank of China captured most of the investor attention in the first half, ICBC is likely to spark the biggest headlines in the second half. The IPO, which is expected in October or November, is set to raise up to $15 billion with the help of CICC, Credit Suisse, Deutsche Bank, ICEA and Merrill Lynch.

Despite its size û or perhaps because of it - bankers have no doubts that ICBC will make it to market this year even if the broader market remains sluggish. And that should open the door for the other two Mainland banks - China Merchants Bank and China CITIC Bank - which are also targeting $1-billion-plus IPOs in Hong Kong in the second half.

"The one industry that seems to be almost immune to the recent market decline is the Chinese banks. Chinese property companies have seen some delays and some low-end pricing, but there seems to be almost insatiable demand for the banks," says David Ratliff, head of Asia Pacific equities at Citigroup.

Citigroup will be arranging the CITIC Bank IPO together with CICC, Citic Securities, HSBC and Lehman Brothers, while China Merchants Bank will be brought to market by CICC, JPMorgan and UBS.

Outside the financial sector China National Coal is the only other mainland company that is expected to bring a $1 billion IPO in the second half. CICC, Citigroup and Morgan Stanley are bookrunning that deal, which is also anticipated in October/November.

If share prices return to valuations that are acceptable to managements or other potential sellers, there may also be a few large-sized placements of new or existing shares. So far there have been only two placements above $1 billion out of China/Hong Kong this year with CNOOC and Sun Hung Kai Properties raising $1.98 billion and $1.01 billion respectively.

But the China pipeline is also expected to churn out at least 10 to 12 IPOs in the $300 million to $500 million category, including several private sector companies and the imminent China Blue Chemical. The producer of fertilizer, which will be spun off from the parent of Hong Kong-listed oil and gas producer CNOOC, plans to sell about $400 million worth of shares in late July or August with the help of JPMorgan and UBS.

In India everybody is waiting for DLF Universal to kickstart the market again with a deal that is set to become the largest IPO ever in India at the aimed for size of $2.5 billion. However, while originally planned for June or July, a more likely timing now seems to be September as certain regulatory issues still have to be worked out, people familiar with the offer say.

Another 30 or so Indian issuers within real estate, the retail and consumer sectors, communications and the financial sector, are waiting in the wings with potential deals in the range of $100 million to $500 million if the market improves, according to sources. However, Indian companies in particular will need to adjust down their valuation expectations to match the current market environment before there is likely to be another widespread wave of new equity issuance as many of them are still hoping for the same lofty multiples that were achievable up until early May, bankers say. This is especially true with the Indian CB market, where premiums of 50% or even 60% are not expected to return in the short- to medium-term.

"There is no doubt that going forward India will be a big user of the capital markets. I think the question is more when and exactly in what form," says one banker.

The "other" Deals

Other chunky deals that could come in the second half but havenÆt yet been mandated include a combined new share issue and sell-down from government investment vehicle Kazanah in Malaysian power producer Tenaga. The size of the combined deal, which is likely to involve two or three bookrunners, will depend on how much fresh capital the company needs, but could total as much as $1 billion, bankers say. Credit Suisse, JPMorgan, Merrill Lynch, Morgan Stanley and UBS are said to be in the running for that mandate.

In Korea, the Ministry of Finance is looking to trim its 24% stake in Korea Electric Power Corp (Kepco), while Korea Deposit Insurance Corp (KDIC), which controls the governmentÆs shareholdings in various domestic banks, is also believed to be planning a sale of its remaining stakes in Shinhan Bank and Woori Bank.

Another government sell-down of about $1.2 billion is planned for Industrial Bank of Korea. That sale, which is targeted for September or October, has been mandated and will be led by JPMorgan, Merrill Lynch, Samsung Securities and Woori.

International investment banks are also said to be eyeing potential mandates related to future equity capital markets activity in the Korean life insurance sector.

In China, there is talk that some banks have revived discussions regarding an IPO in the region of $3 billion for China Southern Power Grid. However, that is a deal which will at best happen in 2007 and could easily drift into "some distant point in the future," according to one banker. Similarly, Shanxi Coking Coal, which has just mandated BOCI, Deutsche Bank, JPMorgan and Morgan Stanley for an IPO of about $1 billion, wonÆt come until next year.

The mainlandÆs third largest truck maker, China National Heavy Duty Truck, which is eyeing a Hong Kong listing of up to $1 billion, could come this year, but is more likely in 2007, bankers say. JPMorgan has been hired to help arrange the sale, but other banks are still believed to be lobbying the company for a role.

In Singapore, bankers see a continued stream of REIT issuance that will keep investors occupied, including the follow-ons from CapitaMall Trust and CapitaCommercial Trust to finance their joint purchase of the Raffles City shopping centre. Aside from the latter, which could be as large as $750 million, the REIT issues will for the most part be no bigger than $100 million to $300 million.

A slightly larger Singapore IPO currently in the works is Chemoil, an oil transportation company which is hoping to raise $400 million to $500 million. DBS, Morgan Stanley and UBS are said to have clinched the mandates for that.

According to bankers, Singapore port operator PSA has also revived plans for an IPO in the next 24 months or so. DBS is considered all but certain to help arrange that issue, but other banks are vying to get their hands on potentiallly two additional bookrunning mandates, they say. The word in the street is that Goldman Sachs, UBS and Morgan Stanley (which arranged the recent debt financing for PSAÆs acquisition of a 20% stake in Hutchison Ports) are the front runners.

Across the border in Malaysia, CIMB and JPMorgan are preparing to bring a $300 million convertible for YTL Corp in the next month or so, which will be the first equity-linked deal out of Malaysia this year.

Taiwan has been very quiet so far in terms of new issuance as TSMC is under a lock-up after its previous share sale and the otherwise expansion-focused TFT-LCD sector essentially completed its funding cycle last year. Several companies, including BenQ, Nanya Technology and Hong Hai Precision have sought approval for equity or CB issues, but not many of them are expected to actually come to market.

"The Taiwan market is always abuzz with rumours because companies seek shareholders' approvals to give themselves flexibility, but you don't always see everything follow through," says Richard Cormack, managing director of equity capital markets at Goldman Sachs. "There is every reason to believe that we will see further issuance out of Taiwan, but I think it will be quieter this year than last."
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