Hong Kong ECM: Changing dynamics

The city has a lot to do to keep its leading position as a global equity fundraising hub. But there are clear signs that the situation is improving.

Hong Kong remained Asia’s biggest equity fundraising hub on an ex-A share basis in the first half of the year, with total equity issuance picking up from the same period last year and set for a huge boost in the upcoming months.

Share sales in the city rose 21% to $17.9 billion in the first six months compared to $14.7 billion from the same period last year, rebounding from a year with the lowest equity issuance since the global financial crisis, according to data provider Dealogic.

Hong Kong is set for a further strong boost in volume if planned initial public offerings from China Tower and Sinopec Marketing come to fruition in the second half. The duo could raise as much as $20 billion combined – already more than the city’s total equity deal volume in the first half.

While total equity deal volume is still below the average of $30 billion in the past few years, there has been an improvement in the overall quality of companies hitting the market, as well as better secondary price performance, according to equity bankers.

"Investor sentiment towards IPOs has been constructive. This is partly due to the strong equity stories coming to market, as well as a reflection of the robust secondary market performance," Alex Abagian, head of Asia Pacific equity syndicate at Morgan Stanley, told FinanceAsia.

For now, attention will focus on to what extent deals in the second half are supported by market-driven institutional money, which has found its way back into Hong Kong IPOs in the first six months.

Evidence for the renewed insitutional interest comes in the form of a substantial decrease in cornerstone investment – the practice of agreeing to invest a particular sum and hold the shares for at least six months in exchange for a guaranteed allocation of shares.

The end of cornerstone woe?

Accepting a substantial amount of cornerstone investment has become the norm for companies seeking to list in Hong Kong, particularly large Chinese state-owned enterprises which seek to minimise the risk of failure.

But this started to change in the first half. Cornerstone investment as a percentage of total IPO volume fell to 23.0% in the first half from 44.7% in the same period last year, Dealogic data shows. In absolute terms, total cornerstone investment has also dropped to $1.7 billion from $3.4 billion a year earlier. 

There was also a substantial decline in cornerstone investment by Chinese corporations, while investment from private institutions and asset managers has been on the rise.

Equity bankers said while “friends and family” deals and large cornerstone tranches are still a reality for SOE related transactions, some of the IPOs completed in the first half showed that there is a vast amount of global long-only money willing to invest in companies that are of good quality, and in deals that are priced and distributed institutionally.

One typical example was Wuxi BioLogics. The biosimilar drug maker raised $511 million in June in the largest IPO in Hong Kong without a cornerstone tranche since 2014. Wuxi BioLogics rose 37% on its debut and was the best-performing IPO in more than six years. The shares have since soared another 24% within three weeks.

Guotai Junan, Hong Kong’s largest IPO this year to date, distributed 28% of its $2.1 billion IPO to cornerstone investors – a fairly low percentage compared to precedent billion-dollar IPOs in Hong Kong. Postal Savings Bank of China, the city’s biggest IPO last year, allocated 77% of shares to cornerstone investors.

Stock market investors believe such reduction improves liquidity in the secondary market and avoids price distortion, resulting in a more reasonable valuation that is deemed fair to most investors. On a broader perspective, it is restoring Hong Kong’s image as an international fundraising hub that is categorised by market-driven prices.

At the same time, more Hong Kong IPOs have been able to achieve their desired valuation by pricing their deals at or near the top of the price guidance, underscoring investor interest in quality IPOs that are priced at valuations that truly reflect market consensus. 

Improving investor sentiment in the first half will support deal flows in the second half, which is expected to be underlined by several blockbuster IPOs such as those of China Tower and Sinopec Marketing, as well as a number of growth stocks of decent size including China Literature, Razer and Zhong An Online Insurance.

“We expect the second half IPO execution pipeline to be fairly crowded with much of the supply coming from growth sectors including internet, technology, fintech and education as well as the broader consumer sector,” said Abagian of Morgan Stanley.

*This story has been updated to correct the figures on cornerstone investment in Hong Kong IPOs

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