IPO activity to remain thin for the rest of the year

So far, only 26% of the funds raised in the equity capital markets in Asia have come from new listings, and the pipeline for the rest of the year suggests that is unlikely to change materially.
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The run-up to new year is looking unusually quiet in ECM
<div style="text-align: left;"> The run-up to new year is looking unusually quiet in ECM </div>

Irrespective of how the earlier part of the year has shaped up, by the end of October I am typically faced with a long list of companies rushing to complete their planned IPOs or fundraisings before business is wrapped up for the year.

The steady deal flow during the final few weeks of the year is encouraged by bankers who are keen for a last-minute boost to their deal count and revenues before it’s time to tally up their performance and contribution to the overall bank during the past 12 months.

Hong Kong tends to get particularly busy, sometimes to the extent that it is difficult for investors to absorb all the paper, or even to find the time to take a proper look at each of the companies coming to market.

Not so this year. The visible pipeline of IPOs and other marketed ECM transactions remains thin, especially when considering that some deals on the list are bound to get pushed into 2013 for whatever reason.

For sure, more deals are likely to pop up along the way, as fashion retail chain Esprit reminded everyone when it announced a surprise rights issue of up to $677 million on Monday this week. But that happens every year. What’s different this year is that the number of known deals is so low to begin with.

You’d have to go back to 2008, in the aftermath of the collapse of Lehman Brothers, to find a November/December calendar as empty as this year’s. (Although back then it was more a case of all deals getting pushed into 2009).

One key reason seems to be the continued reluctance by investors to commit to deals with a long lead time and a long gap between pricing and actual trading, as that means taking on a lot of market risk — unless they are high-profile names and/or offer a decent discount to the stocks they can already buy in the market.

There also still seems to be a gap between what investors are prepared to pay and the valuation that some issuers have in mind.

Stock markets are for the most part doing fine — Hong Kong’s Hang Seng Index earlier this week reached a new high for the year and after ending higher in 16 of the past 18 sessions it is now up more than 18% this year. But there is still lingering uncertainty about Europe’s debt issues, the outcome of the US presidential election, which now appears too close to call, and the pending leadership change in China.

The latter is generally expected to be a smooth affair and the hopes right now are that it will be accompanied by more stimulus measures to support the country’s growth — which should be good for the markets. However, until we know for sure, many investors and issuers are happy to stay on the sidelines, suggesting that we won’t see much IPO pre-marketing activity during the next two to three weeks either.

Instead, the activity is expected to continue to centre around block trades and follow-ons done on an overnight basis, where investors are exposed to little or no market risk. This is primarily what has kept ECM desks busy so far this year and speaking with bankers it doesn’t sound like that is about to change.

According to Dealogic, IPOs (including new listings of companies already traded in another market) account for just 26% of the total ECM deal value in Asia ex-Japan so far this year. This compares with 46% in 2011, 52% in 2010 and 42% in 2009. That is a significant difference, particularly in light of the fact that the total ECM activity is also down 3% from this time last year at $133.1 billion.

While blocks and follow-ons done on an accelerated bookbuild basis have partly made up for the slump in new listings, they are less profitable for the banks involved. So the shift in the deal flow is having a real impact on the industry.

The big one: PICC
Looking at what potentially lies ahead for the rest of the year, the key deal on everyone’s watch list is the IPO of Chinese insurance company PICC. The company, whose property and casualty arm is already listed in Hong Kong, is aiming to raise as much as $4 billion to $6 billion from a combined A- and H-share listing. However, as it still doesn’t have the necessary approvals for a domestic IPO, the plan seems to be to go ahead with the Hong Kong IPO first.

The company is currently trying to sort out the potential cornerstone investors, which is taking time as it has “shortlisted” no fewer than 17 banks to help with the negotiations — and that’s just on the Hong Kong portion of the deal. However, CICC, Credit Suisse and HSBC, which have been advising PICC on the IPO for some time before the other banks got involved seem to be taking a lead role on the transaction, potentially together with Goldman Sachs. Bankers say pre-marketing may start in mid- to late-November.

Other potential deals:


Esprit Holdings
As mentioned, the company surprised the market after the close of trading on Monday when it said it plans to raise between HK$5.17 billion and HK$5.25 billion ($667 million to $677 million) through a one-for-two rights issue. Esprit’s share price plunged 9.5% on the news, but recovered some ground yesterday and at HK$11.38, it is still 30% above the rights issue price of HK$8 per share.

The deal doesn’t require approval from shareholders and the stock will start trading on an ex-rights basis from next Monday. Trading in the nil-paid rights will be open from November 7 to 14 and the subscription to the rights issue closes on November 19. HSBC and UBS are joint underwriters.

Horizon Hospitality
The spin-off of Cheung Kong’s extended-stay hotels business through a trust that will be sold to investors in the form of stapled securities. The structure will be similar to that used for the spin-off of PCCW’s HKT Trust last year. The IPO may raise up to $850 million and offer a yield of at least 6.5%, according to sources.

Cheung Kong submitted a listing application on October 11 and the aim is to start pre-marketing sometime in November. Bank of America Merrill Lynch, DBS and Standard Chartered are joint bookrunners.

CIFI Holdings
CIFI is a Shanghai-based property developer that is looking to raise between $200 million and $300 million. Like many other Chinese developers it is primarily focused on the residential sector, complemented by some commercial properties. It is unclear whether it stands out from its listed peers in any significant respect and some sources have argued that it will need to offer a significant discount to net asset value to attract investors — perhaps as much as 60% to 70%.

Pre-marketing started on Monday this week and is planned to last one-and-a-half to two weeks, after which the bankers will assess the feedback and decide whether to go ahead and launch the deal. Citi, Morgan Stanley and Standard Chartered are joint bookrunners.

Zhengzhou Coal Mining Machinery
A leading manufacturer of mining and excavating equipment and China’s biggest maker of hydraulic roof supports, Zhengzhou is already listed in Shanghai. It started pre-marketing for a $400 million to $500 million Hong Kong IPO in mid-September, but then chose to go back to the Chinese regulators to ask for an increase of the maximum discount versus its A-share price to 15% from 10%.

According to a source, the regulators have verbally agreed to its request and the company is currently about to file a formal application, which is expected to take about a month to get processed. Hence, the deal is unlikely to hit the market before late November or early December. Citic Securities, Deutsche Bank, ICBC International, J.P. Morgan and UBS are joint bookrunners.

Mando China
Korea’s second largest auto parts maker, Mando, is looking to list its Chinese businesses in Hong Kong and the deal could come later this year. The IPO will account for about 20% to 25% of the company and may raise about $150 million to $200 million, sources say. Deutsche Bank and Morgan Stanley are reportedly arranging the deal.

Chinalco Mining
A unit of state-owned Aluminum Corp of China and the owner of a copper deposit in Peru, Chinalco Mining was initially aiming for an IPO of up to $1 billion in June, but never launched the deal despite extensive pre-marketing activities. Sources say it may be returning to the market in the next couple of months with a significantly smaller deal of perhaps $250 million to $350 million. BNP Paribas, CCB International, CICC, HSBC, Morgan Stanley and Standard Chartered are working on the deal.

China Longyuan Power
China’s largest producer of wind power announced a follow-on of up to 50% of its existing H-share capital back in May and received shareholders’ approval in early July. Based on yesterday’s closing price of HK$5.14, it may raise as much as $900 million before applying a discount. The Chinese power sector has been under pressure though, and this deal could easily get pushed into 2013. Morgan Stanley and UBS are joint bookrunners.


A provider of an online social media platform with 400 million registered users, YY could be the first Chinese company of size to list in the US since March. Based on the initial filing, it is aiming to raise up to $100 million. Pre-marketing started on Monday this week and is expected to last for about two weeks. A formal roadshow and bookbuilding may launch after that. Citi, Deutsche Bank and Morgan Stanley are joint bookrunners.


Bharti Infratel
The mobile tower unit of mobile phone company Bharti Airtel is looking to raise as much as $1 billion from an IPO. Bankers are currently marketing the transaction to potential anchor investors and the deal is expected to launch in late November or early December. Bank of America Merrill Lynch, J.P. Morgan, Standard Chartered and UBS are joint bookrunners.


Tanduay Holdings
A distiller famous for its Tanduay rum, Tanduay is looking to sell up to 3 billion new shares through a top-up placement. Based on yesterday’s share price of Ps11.58 it could raise about $835 million. Shareholders approved the fundraising in September and sources say the deal is expected to launch either late this year or early next. UBS is the sole bookrunner.


PTT Exploration and Production
PTTEP has announced a preferential share offer to existing shareholders of up to 650 million new shares as part of the financing of its acquisition of London-listed Cove Energy. Based on the current market price, the deal could raise up to $3.3 billion, although parent company PTT will take up its 65.3% entitlement in full. The final price will be determined through a bookbuilding exercise and any excess shares will be offered to institutional investors.

PTTEP’s shareholders will vote on the transaction on Monday and assuming it gets approved it could launch at any time after that. Bank of America Merrill Lynch, Deutsche Bank, Finansa, Goldman Sachs, J.P. Morgan, Phatra Securities, Tisco Bank and UBS are said to be working on the transaction.

Tesco Lotus Retail Growth Freehold and Leasehold Property Fund
Tesco’s Thai property fund is aiming to raise up to Bt7.5 billion ($240 million) from existing shareholders to fund its investment in five Tesco Lotus-anchored shopping malls. Shareholders approved the deal on October 5 and it will be open to investors whose names appear on the shareholder register on November 6. The subscription ratio and price have yet to be announced. Bank of America Merrill Lynch, Citi, HSBC and Phatra Securities are joint bookrunners.

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