Hong Kong sell-downs taper off after record April

Following several large private equity sell-downs in Hong Kong there are signs that block sales are taking a breather.

After a record volume of share sales in April, institutional investors are starting to turn cautious on further offers believing Hong Kong's stock market may have peaked at seven-year highs, say bankers. 

Long-only institutional investors — the main buyers of these accelerated offerings — feel that markets have peaked and are due for a correction, according to market sources.

The Hang Seng Index has climbed 16.6% so far this year up to May 7, while the Shanghai Stock Exchange Composite Index is up 27% year-to-date.

Sell-down volumes in Hong Kong hit an all-time high of $3.6 billion in April according to Dealogic data as fleet-footed shareholders such as private equity firms took advantage of the run up in stock markets to offload stakes in Chinese companies, such as Hony Capital's $1.26 billion sale of its 23% stake in CSPC Pharmaceutical on April 16; and US private equity firm Carlyle's $425 million decision to cash in on a near-four year investment in Haier Electronics Group on April 15.

Now investors are turning leery of further offers, wondering where the upside will come from. 

This is evidenced by a number of accelerated block trades that have been pulled recently. A $140 million block in China Water launched by Goldman Sachs on May 5 was cancelled, while UBS yanked an $80 million placement in Luye Pharma Group on April 29.  

Since Hong Kong’s Hang Seng Index hit a new seven-year high of 28,433.59 on April 27, it has dropped 3.2% up to May 7. The Shanghai Stock Exchange Composite Index meanwhile fell 9.2% in the same time-frame.

“We’re going to see some tension and cracks in the woodwork in terms of blocks,” one Hong Kong-based ECM banker told FinanceAsia. “The deals that only get done in bull markets are starting to pull back.”

Long-term bulls

Despite the slowdown, sources maintain that the stock market rallies have legs and expect Chinese investors to continue flooding into Hong Kong for the remainder of the year.

It’s not hard to see why mainland investment into Hong Kong will perk up again after a breather, given that A-shares listed in Shanghai are currently trading at a 30% premium to their corresponding Hong Kong-listed stocks. This is an about-turn from last summer, when A-shares were trading at a 10% discount to H-shares, according to the Hang Seng China AH Premium Index.

Investors who have worried about illiquidity in Asian markets have taken heart from the fact that Hong Kong’s exchange briefly saw the largest turnover in the world, among markets open to global investors which excludes A-shares, totalling $32.26 billion on April 8 and $37.62 billion on April 9, according to Bloomberg analytics.

There are also structural changes afoot as the Chinese government looks to deepen its capital markets, encourage investors to put their savings to work and turn around poor performance.

Beijing is also looking to institutionalise its markets which will help dampen volatility.

“The move from asset management being a very small industry to very large with a more global focus has been extraordinarily rapid over the past two or three years,” CITIC CLSA’s head of corporate finance and capital markets Andrew Low told FinanceAsia. Low sees the Chinese investor community taking up a larger proportion of Hong Kong ECM deals.

While long-only institutional investors — such as BlackRock and Fidelity — will undoubtedly seek to purchase Hong Kong shares while they’re still at lower valuations to A-shares, the demand may shift in the coming years, another ECM banker told FinanceAsia.

He expects mainland demand will eventually start to overshadow international demand, predicting that some 80% of Hong Kong IPOs and blocks will be distributed to Chinese institutional investors, state-owned enterprises and retail investors.

Additional reporting by Alison Tudor-Ackroyd

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