PWC bullish on the Hong Kong IPO market

The firm increases its end-of-year fund raising forecast, but also expects Hong Kong-listed Chinese companies to continue to look to their home market for fresh funds.
PricewaterhouseCoopers (PWC) says the healthy momentum in Hong KongÆs initial public offering market will persist as the Hang Seng Index continues to hit historical highs.

Richard PY Sun, a partner at the firm, believes that Hong Kong and China combined will be among the three most active markets in the world in terms of IPO funds raised by the end of this year together with New York and London. As for Hong Kong alone, it should easily make it to the top five.

The international accounting firm has lifted its full-year forecast for IPO funds raised in Hong Kong to HK$200 billion ($26 billion), which is one-third more than its projections in January. Among the listing candidates will be medium- to large-sized China-based companies within the financial services, real estate, retail and consumer goods, minerals and power-related sectors. It also projects that the average price-to-earnings ratio of newly listed companies will be ranging from 18 to 22 times.

ôIPO activities in the second half will remain driven by the booming stock market in Hong Kong,ö says Edmond C K Chan, another PWC partner.

The Hang Seng Index climbed 0.3% yesterday to a fresh high of 22,218.55 points, bringing the total gains so far this year to 11.3%.

The estimated fund raising for this year is below last yearÆs HK$341 billion, when the total was somewhat distorted by the Bank of ChinaÆs $11.2 billion IPO and Industrial and Commercial Bank of ChinaÆs massive $21.9 billion share offering, which marked the worldÆs largest IPO ever.

However, more companies will come to list in the market this year, according to PWC. The firm projects 70 new companies will list on the main broad this year, compared with 58 in 2006.

At the same time though, PWC also expects there will be more Hong Kong-listed Chinese companies seeking to get access to the A-share market. The firm estimates that the IPO funds raised in the A-share market will reach Rmb400 billion ($53 billion) in 2007 (up from a projection of Rmb200 million at the beginning of the year) and Sun believes that nearly Rmb300 billion of that sum will be attributable to Hong-Kong-listed Chinese companies flocking back home to offer their shares.

ôWith only limited investment vehicles, there is huge liquidity within the country. As the demand for shares exceeds supplies, more Chinese companies are interested in offering their shares in the A-share market,ö says Chan.

According to PWC, IPO funds raised in the A-share market in the first half amounted to approximately Rmb169 billion. Of the total, around Rmb130 billion were raised by H-share companies already listed in Hong Kong or companies seeking dual listings in Hong Kong and Shanghai. Sun believes the Chinese government will continue to encourage local companies to list in the A-share market, but he also notes that the two markets are helping rather than fighting each other. The total market is just huge, he argues.

ôA great number of Chinese companies with considerable size and quality are up to the standard needed to list,ö says Sun.

ôThe two markets are more mutually-driven than competing, since they serve companies with different needs,ö adds Chan.

International investment banks may be more inclined to see the two markets as competing entities, however, as currently only Goldman Sachs and UBS can underwrite equity offerings, including IPOs, in China. When companies choose to list in the A-share market rather than in Hong Kong, banks other than these two can only watch as their clients walk to another bank.

IPO funds raised in Hong Kong in the first six months this year amounted to HK$102.6 billion ($13 billion), which was 9% less than in the same period last year, according to PWC data. Excluding deals above HK$5 billion, the average deal size was around HK$1.3 billion. Among the 34 new companies that went public, only 58% are H-share companies, compared with more than 85% in the first half of 2006.
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