One of the key reasons ascribed to Bank of China's successful IPO was the decision to place a percentage of the international equity offering with Japanese retail investors through a POWL (public offer without listing). By widening its potential investor base, Bank of China was able to play off different investor bases to build momentum and leverage up the pricing it could achieve.
As a result, 12% of its $2.47 billion IPO was placed in Japan after 80,000 domestic investors placed orders for $2.9 billion via POWL lead manager Nomura. Putting this figure in context, there was one Japanese retail investor for every four domestic retail investors from Bank of China's home market, Hong Kong. And Japanese investors placed far bigger orders than Hong Kong retail, submitting an average order size of $35,000 to $40,000.
Here, David Dean, Nomura's head of Asian equity capital markets, explains why we are likely to hear a lot more about the POWL in the future.
I got the impression the strong demand generated by the Japanese tranche was one of the key reasons why the overall deal could be priced as high as it was. What's your take?
Dean: I can't comment directly as we weren't party to pricing discussions but yes I guess it was important. With the way markets have become so volatile over the past couple of years, Japan offers a huge potential source of demand that can't be ignored any longer. We always thought Bank of China would be an ideal candidate for an offering to Japanese retail as there hasn't been a Chinese POWL before. It proved to be a big success and we expect it to open up the market for other Chinese issuers. Our original demand estimates were around $1 billion, so even we were surprised by the final tally. But it was a story that appeals to Japanese investors. Bank of China has a much more exciting equity story than Japanese banks and to some extent it's seen as a proxy for the China growth story. There's huge interest in China at the moment in Japan and we're hoping this will be the first POWL of many.
How long has the POWL been in existence?
It's been around for a long time. The first one was back in 1976 for Bank of America. Then during the 1980's Japan started to increase its international profile and companies chose to list offerings on the Tokyo Stock Exchange rather than do a POWL. But it's now swung back the other way and TSE deals now tend to be restricted to issues by companies that are already listed such as Deutsche Telekom. In terms of international equity offerings, our research shows there's been 61 POWL's and 20 listings since 1976. Of this number, there have been four POWL's from Asian and two listings. POWL's comprise Bank of China, Korea Telecom, Cheung Kong Infrastructure and PT Telkom, while Henderson Land and YTL actually listed on the TSE.
Why have there been more POWL's than listings?
It's mainly a matter of timing. It can take up to six months to achieve a TSE listing. POWL's have always been much quicker. In the early days, it probably used to take about three months, but the Japanese authorities seem to be becoming more flexible with every deal and Bank of China only took around five weeks to complete initial filings. It's ironic because one of the misconceptions people always have about Japan is that it's highly regulated and bureaucratic. Yet they have this rather unique system in place, which enables companies to place stock with retail investors without actually going through a listing. As far as I'm aware this is not the case with any other major jurisdiction.
So when a company does a POWL, there's no listing anywhere in Japan? The stock continues to trade on its home market? It simply involves the placement of a large amount of stock with Japanese retail investors.
Yes, Bank of China for instance will trade through the Stock Exchange of Hong Kong. Also Korea Telecom did a POWL last summer as part of its roughly $2 billion ADR. This trades through NYSE Japanese investors buy whatever stock is placed internationally whether it be a share or DR. Because there isn't a listing, it's very easy to get these deals processed and they can be approved in a matter of weeks.
So how does a company go about it?
Basically, an issuer has to file a Securities Registration Statement, or SRS as its otherwise known, with the Japanese MoF. Essentially this is just a translation of the international offer document. Then there are various things needed on top of this such as a Japanese translation of a company's articles of incorporation and accounts. The key is in melding the various regulations together because there's certain things allowed in Japan and certain things allowed in the home markets. Every time we do a POWL, we learn something new.
How much does this extra documentation bump up a deal's cost?
The main cost comes from printing prospectuses. We printed around 150,000 for the Bank of China deal, although all the information was all pulled out of the SRS. The client doesn't really have any incremental work. It's a matter of getting the issuer's lawyer and underwriter's counsel to liaise with the Japanese lawyers and iron out any regulatory differences.
Is there a certain size threshold, which makes a POWL worthwhile for a company contemplating an international equity offering?
A $500 million deal would be marginal. To make it worthwhile, an issuer should be looking to raise at least $1 billion. And as a ball park about 10% to 20% of the overall deal should be placed with Japanese investors.
Can Japan's institutional investors participate as well?
Once a POWL is set up virtually all Japanese institutions and corporate investors can participate though it tends to be the smaller institutions that place through the POWL. We also market the big accounts, but generally they'd place their orders offshore. Without setting up a POWL, there is a similar system to rule 144a in the US allowing placement to institutional accounts in Japan. But whereas all qualified institutional buyers can be targeted in the US, only 49 can be targeted in Japan for each issue. So the key to unlocking Japanese demand is getting retail involved.
Another thing to bear in mind is that Japanese retail investors are still much more likely to invest in single stocks rather than unit trusts. The Japanese unit trust industry is growing rapidly but it's still relatively small compared to America and Britain. Institutional money is much less developed. At the moment retail investors still dominate.
What's the retail investor base like?
Large and liquid. The one thing all foreign issuers should bear in mind is the huge liquidity of retail investors. About 12 years ago a retail investor could have got a 10-year fixed rate deposit for 7% to 8%. Two years ago all these deposits started maturing and now fixed rate deposits offer as little 0.07%. Japanese investors have large amounts of cash and a huge chunk of it is now sitting in call deposits rather than fixed term deposits. The retail sector has the equivalent of $11 trillion in assets. In the six months to March, the average net inflow to our funds was $800 million a month. In April alone we estimate it was $2.5 billion. There's a hell of a lot of liquidity looking for a home.
How do you target retail investors when you get a POWL mandate?
Nomura has about 3.5 million retail accounts and we hold about $230 billion in custody on their behalf. When we do a POWL we'd automatically make everyone aware of it, but the focus would be on investors with more than $1 million in custody with us. There's probably about 50,000 investors in this category. We market the deal through our 120 odd branches and 2,500 strong retail sales force. While the rest of the global syndicate is pre-marketing, our analyst would be in Tokyo visiting branches. Our main task is to educate the sales force and the branch manager. So we make a lot of general presentations, conference calls etc etc. We also have our own satellite system, which beams into all the branches. Actually it's not unusual for a single branch in Tokyo to place an order for $100 million. All in all, it's a bit like mobilising a small army.
And as I just said, the main hurdle is convincing our vast sales planning division that this is a company which would appeal to Japanese investors. Once we've got their support, we're very confident about going back to the issuer and saying we can sell this product and demand will be X amount. I had a very interesting conversation with our analyst where he said that he got a far worse grilling from our internal sales force than he did from institutions. You know people say there's a herd mentality in Japan, but the sales guy has to know a particular story fits what his investors are looking for. The days when retail investors would buy anything are long gone particularly given what's happened to the Japanese market in the last decade or so.
But when you say retail, it's not actually retail in the sense that most people would understand the word. With the kind of sums you're talking about, Nomura's acting more like a private bank.
Yes that's definitely one way to look at it. When we did Korea Telecom the average order size was over $40,000. The POWL allocation was around 14% of the overall deal.
How do Japanese retail behave in the secondary market. Are they buy and hold investors?
Japanese investors aren't really sensitive to market conditions. They're very focused on single stocks and the key is whether they like the equity story or not. They don't tend to be big sellers either as they're prepared to sit and wait for the upside they think they should get from a stock. When Deutsche Telecom did its deal, for example, the price immediately slid, but hardly any Japanese sold. In declining markets it's very rare to see them sell. As another example, Korea Telecom went up 10% in the immediate aftermarket and a couple of weeks later the vast majority of our clients who had purchased, still held it.
How many hold it now?
I don't know exactly but I guess it could be less than half
So with a difficult deal where there's a high chance investors will immediately flip the stock, a POWL acts like the greenshoe? It's a good way of keeping the stock stable.
I think that's a fair analogy.
What kinds of stocks do the Japanese want?
Generally Japanese investors have a relatively small number of big holdings. They also tend to look at the biggest issuers and, therefore, focus on quasi-privatizations. Really they're only just starting to diversify their holdings internationally, but over time we expect them to gradually filter down to smaller companies. For instance, there's probably only five or six China-related stocks which are widely held in Japan.
They're also happier with sectors, which are well established in Japan. Hence it would probably be more difficult to sell Chinese oil companies than Bank of China because there haven't really been any comparable Japanese oil companies. But it would be easier to sell a Chinese telecom company, or a DRAM manufacturer like TSMC. From an M&A and corporate relationship perspective, a POWL could also help issuers raise their profile.
And why do you think China is so hot at the moment?
Well if you look around the world, China has one of the most impressive growth stories. There's been an enormous amount of publicity in the Japanese press about China. A few months ago the Nikkei even created a special China section, which runs on the front page every day. More and more Japanese companies are also setting up operations on the Mainland and Japan is now China's second largest trading partner. Interest to this degree will obviously come and go in waves, but it's become very noticeable since the American economy started to go the other way.
As a result, we've seen a huge increase in the Chinese funds we run in Japan. In the six months to March, we had $600 million come in.
Tokyo seems to be the big loser in all this though. You're accessing the Japanese retail investor base but it's foreign stock exchanges which reap the benefit.
Japanese investors are reasonably comfortable trading in non yen currencies. The idea of a Yen DR has never taken off in Japan. Indeed, it was only relatively recently that a DR has been widely acknowledged as a proper security. Japanese investors still prefer shares. We don't really see it in terms of Tokyo losing out, more that issuers gain in being able to access Japanese investors so easily. There are also knock-on effects too in terms of raising the profile of Japanese investors and the other revenue brought into Japan for printers, lawyers, - even securities houses.