Encouraged by the optimistic prospects for the overall economy and the equity markets, a significantly greater proportion of Chinese companies are seeking a public listing as a way to finance their growth, compared to those that are opting for bank loans, Grant Thornton has found in a survey.
The efforts by Chinese authorities to curb inflation have “led to a tightened money supply and an increase in the cost of loans, making more businesses turn to other means of financing. We believe that in 2011 we will see more mainland businesses undertaking merger and acquisition (M&A) activities and seeking to list in Hong Kong,” said Barry Tong, a partner of transaction advisory services, at the firm.
Grant Thornton, a US accounting and management consulting firm, successfully interviewed more than 5,700 privately held businesses (PHBs) from 39 economies worldwide, including 179 Chinese companies and 120 Hong Kong ones, in the annual survey released yesterday.
It found that 24% of the Chinese companies are planning to sell shares to fund their development, an increase from 11% last year. By contrast, of all the companies surveyed globally, only 5% ticked public listings as the most preferred way of financing.
China is second only to Poland in terms of companies' desire for public listings, according to the Grant Thornton study.
The Chinese companies indicated an intention to list on the stock exchanges of Hong Kong, Singapore and London, “but I believe Hong Kong will be their number one option thanks to the strong liquidity in the market”, Tong said.
However, another survey conducted by Shanghai-based global research and analytics firm Evalueserve late last year, told another story. Evaluserve interviewed 150 private companies on the mainland and found that 76% of them were interested in a domestic listing rather than an overseas one. The main forces driving Chinese companies to select domestic listings are the desire for domestic brand exposure, the maturing of domestic markets and cost benefits, Evalueserve said.
However, the China Securities Regulatory Commission has the ability to interject in the market and plays a key role with regard to how quickly a company goes public.
Companies in China may raise more than Rmb400 billion ($61 billion) this year from initial public offerings, and financial services providers, information technology companies and industrial product manufacturers are likely to lead the deals, PricewaterhouseCoopers (PwC) has said.
In the bank finance category, China ranks 35 out of 39 in the Grant Thornton survey, with just 42% of the companies saying they will finance their capital expenditure through bank loans, versus a global average of 54%.
By comparison, Hong Kong companies appear to be more conservative than their cross-border counterparts. A significant majority, 73%, of the Hong Kong respondents indicated they will rely on retained earnings to fund growth. The proportion of companies planning to raise funds through a public offering increased to 7% from 5% last year, but was still far below the 22% pre-financial crisis level in 2008.
“Hong Kong is a very mature market and most companies would rely mainly on retained earnings and bank loans to meet the financial costs of business expansion,” said Daniel Lin, managing partner of Grant Thornton in Hong Kong.
The survey also found Chinese companies increasingly enthusiastic about overseas M&A deals. The proportion of companies that plan to grow through M&A surged from 26% last year to 45% this year, which improved the country's ranking in the survey to 9 from 21.
Of the mainland companies that are planning acquisitions, the proportion eyeing an international target increased to 26% this year from 17% in 2010, indicating a stronger intention to “go global”. Their motivations for such deals, according to Grant Thornton, include: building scale; gaining access to new geographic markets; acquiring new technology; and established brands.