For a long time, an overseas listing has been an aspiration of Chinese companies. However, foreign exchanges are losing their appeal due to lower liquidity and more private companies in China are likely to prefer a share sale in the domestic market in coming years, a recent survey has found. This will increase the proportion of Chinese initial public offerings in the domestic market.
About 76% of private companies surveyed indicated an interest in a domestic listing versus an overseas one, which is a higher portion than the 63% of total Chinese IPOs that were launched on a domestic exchange in the past five years, global research and analytics firm Evalueserve found.
The firm interviewed 150 companies on the Chinese mainland that have the intention of raising capital in the public markets over the next few years, as well as publicly listed Chinese companies that have already raised capital via share offerings, to find out their IPO preferences and the reasons behind their decisions.
“There are three main forces driving Chinese companies to select domestic listings -- the desire for domestic brand exposure, the maturing of domestic markets and cost benefits,” said Kristin Graham, an investment research analyst at Evalueserve China.
The maturing of China’s capital markets was exemplified by the launch of the Growth Enterprise Market in Shenzhen in late 2009, a board designed for start-up companies, which intends to become China's Nasdaq. Beijing’s efforts to transform Shanghai into the world’s financial centre by 2020 also facilitates the progress, the firm said.
Among those planning a local listing within the next five years, 62% are leaning towards the Shanghai Stock Exchange, rather than the Shenzhen market. That may make the primary market in Shanghai busier next year, especially if global capital markets remain weak.
However, “the CSRC (China Securities Regulatory Commission) has the ability to interject in the market to maintain stability and plays a role in the speed at which a company goes public. IPO activity is difficult to predict,” said Shanghai-based Graham.
The study also found that Chinese companies prefer domestic exchanges over the neighbouring Hong Kong stock exchange. Throughout the past five years, 18% of Chinese IPOs took place in Hong Kong, while only around 9% of the respondents to the survey expressed an interest in a Hong Kong IPO going forward.
The latest share issuer to pick Shanghai over Hong Kong and the US was Sinovel Wind, a leading wind turbine maker in China, which raised Rmb9.5 billion ($1.4 billion) earlier this month after pricing its shares at Rmb90 apiece -- the top of the indicated range between Rmb80 and Rmb90.
The company decided to list in Shanghai because its domestic rivals Goldwind and China Ming Yang Wind Power, which went public last October in Hong Kong and the US, respectively, both had a weak secondary-market performance following their listings. Sinovel's management was quoted by Chinese media as saying that the company wanted to avoid the lukewarm market response received by its domestic rivals.
However, some retail plays that strive hard to seek brand exposure on the mainland, have still chosen to list in Hong Kong. Bawang International, a Chinese herbal shampoo company, which raised $215 million in a Hong Kong IPO in 2009, targets mainland customers, especially male, who are becoming increasingly aware of the health of their hair as their standard of life improves.
“Despite the decrease of the Shanghai stock index last year, the mainland stockmarkets are overall more dynamic than their counterpart in Hong Kong,” said Liu Antian, a fund manager at Dacheng Selective Value-added Fund, which has more than Rmb3 billion of capital under management.
Evalueserve's Graham thinks both the primary and secondary markets in Shanghai will have a strong year in 2011. As the government continues to impose regulations to help cool the property market, it’s likely that Chinese investors will reallocate their capital to equity markets since few alternative investment vehicles are available. This should result in a steady flow of Chinese money out of real estate and into the equities, she argued.