Fed rate cut comes too late for Asian IPOs

Changsheng and Cebu Air postpone their IPOs as Asian markets tumble. Another four deals that are due to price this week hang in the balance.
The surprise US Federal Reserve rate cut last night may have helped to halt the panic sell-off in financial markets, but the move came too late for some of the ongoing initial public offerings in Asia. These IPOs have been faced with rapidly declining valuations for their sector peers and investor reluctance to add to their exposures.

Asian stocks tumbled across the board yesterday, prompting two of the listing candidates to postpone their IPOs before finishing the roadshows. Sources say there could be more casualties before the end of the week unless there is a significant rebound in the secondary market.

ôPortfolio investors are looking at what they have got already and donÆt want to take on any more deals. I would be surprised if anybody could price in this environment,ö says one banker.

However, a rebound û or at least a stabilisation of share prices û could be within reach after the Fed trimmed its benchmark Federal Funds rate by 75bp to 3.5% last night. The move came ahead of the FedÆs scheduled rate-setting meeting next week, which indicates that Ben Bernanke and his advisers view the current economic situation as very serious. This was further underscored by the fact that it was the first emergency rate cut since the aftermath of the September 11 terrorist attacks in 2001 and the largest rate reduction since 1984.

Indeed, equity investors initially focused on this negative message and the US markets plunged when they re-opened yesterday after a public holiday on Monday. The Dow Jones Index was down as much as 465 points, or 3.8%, in the first hour of trading, while the Nasdaq Composite index fell 119 points, or 5%.

The initial declines werenÆt quite as bad as had been indicated by the index futures, however, and both indexes started to battle back. By 2.30pm New York time, or five hours into the session, the Dow was off only 1.1% at 11,965 points while Nasdaq was down 2.1% at 2,291 points.

Although still in the red, the intra-day recovery in US markets was a definite improvement from the massive losses suffered by Asian markets yesterday. AustraliaÆs benchmark index fell 7% in its tenth straight day of declines, Hong Kong lost 8.7%, Jakarta 7.7%, Shanghai 7.2%, Taiwan 6.5%, IndiaÆs Nifty index was off 5.9%, the Nikkei 5.7% and Korea fell 4.4%. Singapore was the best performer among the major markets with a relatively modest decline of 1.7%. Several indexes in the region are now showing compounded losses of more than 20% on recent peaks, including the widely-watched MSCI Asia Pacific index. A loss of this size is typically viewed as a sign that a market is in recession.

As the sell-off in Asia appeared to have been caused primarily by fears of a US recession, the rate cut ought to indicate that the Fed is at least trying to prevent a recession. And while a rate cut alone wonÆt be enough to restore investor confidence û for that investors will need to see more positive earnings news as well û it should help put a brake on the panic selling.

In Hong Kong, real estate developer Changsheng China Property chose not to wait for a potential recovery, however, and yesterday called off its $144 million IPO. According to sources close to the offering, Chinese property companies have been among the worst hit in the past week and this would have made it hard for Changsheng to hold its ground in the aftermarket.

ôEven the blue-chips kept falling as the market tumbled, not to mention existing property stocks. In that environment it is hard to get anybody to invest in a new name and drive up the stock,ö says one source.

Another banker not involved in the deal says the difficulty in launching an IPO is that the issuer and the bookrunners have to make a call on how the market will trade for a whole week until the stock debuts.

The retail portion of ChangshengÆs offering was due to close at noon today (Hong Kong time), while the institutional tranche was to remain open until the close of New York trading tomorrow. The deal was arranged by BOC International and Cazenove.

In the Philippines, Cebu Air issued a statement saying it had decided û in consultation with JG Summit, which owns 100% of the company, and sole bookrunner UBS - ôto postpone its IPO until further notice given the extreme volatility in global equity marketsö. The company, which operates a budget airline under the name of Cebu Pacific and was seeking to raise up to $288 million, said the positive feedback from both international and domestic investors during the roadshow had been overtaken by global economic concerns.

Meanwhile, Honghua, a Chinese manufacturer of oil drilling equipment, has delayed the institutional roadshow for its $500 million to $600 million IPO that was originally planned to kick off in the middle of this week. Sources say the reasons for the delay were not related to the market, but even so it was quite clear that none of the parties involved were that eager to rush it out. That deal is now expected to come after the Lunar New Year holidays in early February. Credit Suisse and Morgan Stanley are joint bookrunners.

The other listing candidates currently in the market are battling on for now. These include Maoye Department Store, SFK Construction Holdings and solar wafer manufacturer Solargiga Energy Holdings, which are all hoping to go public in Hong Kong, and Indonesian processed timber products manufacturer Samko Timber, which is pursuing a Singapore listing. All four of these companies are due to close and price their offerings later this week.

The Maoye deal, which is being managed by Goldman Sachs, is by far the largest of the four with a base size between $697 million and $905 million. According to market participants it is also the most popular because of its focus on domestic consumption. They say that if any of the four IPOs is to be completed successfully, it is likely to be Maoye.

However, other Hong Kong-listed department stores have taken a beating over the past week, which has made MaoyeÆs valuation at 29 to 37.7 times its projected earnings for 2008 look relatively less attractive. Observers say these stocks may have suffered not because investors have lost confidence in them, but because they are looking to secure profits by selling some of their better stocks and the department stores fit that bill.

Sector leader Parkson Retail Group, which traded at about 45 times forward earnings at the start of MaoyeÆs roadshow, dropped to 34.1 times after falling 27% in seven trading days, including a 14% drop on Monday. A 7.3% rebound yesterday (some investors may have viewed the sell-off as a bit excessive) brought its 2008 price-to-earnings valuation back up to 36.6 times, but the gap to Maoye, which is much smaller in terms of number of stores and is not yet a national player, is now tight even at the bottom of the range.

Indeed, sources say the order inflow has been minimal over the past couple of days and some institutional investors were even pulling their orders yesterday as the Hang Seng Index lost more than 2,000 points or 8.7% of its market value. However, people close the deal say there had been no meaningful retraction of orders and the deal was still covered last night, making the company hopeful that it will be able to get the offering across the finishing line. MaoyeÆs retail offering closes today, but the institutional book will stay open until 5pm New York time tomorrow. The price is due to be fixed early Friday morning Hong Kong time.

SFK and Solargiga were also said to be struggling and before the Fed rate cut there was a lot of speculation that they would also postpone their offerings. What speaks for both of these deals is the fact that they are small, meaning they donÆt need to convince that many investors in order to be fully covered. On the other hand, they may find it easier to make the decision to delay now that two other companies have led the way.

Ultimately though, whether these deals go ahead or not will boil down to whether investors regard the valuations as reasonable in light of a weak secondary market. Solargiga has already lowered its price range by 10% to make the deal more attractive versus its peers, but unfortunately the solar power sector has continued to fall since then.

ôWhen fund managers are suffering from portfolio losses, orders are slow to come in. It is understandable that investors avoid increasing their exposure to equities at a time when the market is freefalling,ö one observer says.

Based on the new price range Solargiga is hoping to raise between $221 million and $265 million at a 2008 P/E valuation of 15.4 to 18.4 times. BNP Paribas is the sole bookrunner for the deal, which is due to price early Friday morning. SFK, which focuses on construction and civil engineering projects in Hong Kong and Macau, is aiming to raise between $115 million and $155 million with the help of ICEA. That deal is scheduled to price Thursday.

The institutional portion of ChangshengÆs IPO was said to have been fully covered as of yesterday, although sources note that some orders were contingent upon the market stabilising or seeing a bit of upside before the end of bookbuilding. The company didnÆt mention when it might return to the market, but most likely this deal will now not happen until late in the second quarter at the earliest.

Cebu Air said it has ôevery intention of returning to the public markets once market conditions permitö and stressed that its expansion plans are not at risk as a result of the postponement. Of the total shares on offer, only 53% were new, meaning the company was to get just over half of the net proceeds.
¬ Haymarket Media Limited. All rights reserved.
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