SFK follows others and postpones listing

The construction company believes the market fluctuations leave little hope for it to trade up in the aftermarket.
Construction and civil engineering contractor SFK Construction finally decided yesterday to withdraw its initial public offering. The decision was made three trading days after it closed the order book last Wednesday and came on a day when the Hang Seng Index lost another 4.3% to close only slightly above 24,000 points.

The management does not want to sell the shares too cheaply and the market seems to refuse to settle down, a source says on the question of why the company chose not to list now.

ôIt is unlikely for the stock to have a decent aftermarket performance at the moment,ö the source says.

SFK and its sole bookrunner ICEA were scheduled to fix the price of the offering on Thursday last week, but delayed the final call while pondering whether to proceed with the listing. In the meantime, three other Asian companies pulled their respective deals over the weekend, leaving SFK as the only outstanding listing candidate that hadnÆt cancelled its IPO.

The construction company, which focuses primarily on construction and civil engineering works in Hong Kong and Macau, had sought to raise between $115 million and $155 million at 8.5 to 11.5 times its projected earnings for the fiscal year to March 2009. The company is controlled by the Lo family that also owns Hong Kong property developer and investor Great Eagle Holdings.

Investors tend to avoid buying new companies in a volatile market because there are a lot of uncertainties. Among them is the time lag between the price determination and the trading debut, which in Hong Kong is about one week. And when the market tumbles, new listings can suddenly look very unattractive compared to their sector peers.

ôInstead of the quality of listing candidates, it is the market condition that determines the demand for IPOs at the moment,ö remarks a source.

The 14-day historic volatility in the Hong Kong market has risen to 101.4%, according to Bloomberg data, which indicates that the market is five times as volatile as it was a year ago. Last Tuesday û the day before SFK closed its order books - the Hang Seng Index finished at a recent low of 21,757 points after tumbling more than 13% over a two-day period. The index then staged a strong rebound on Wednesday when it gained 10.7% on the back of the surprise rate cut by the US Federal Reserve and on Friday it once again closed above 25,000 û only to record another substantial fall yesterday. At the moment nobody can tell which direction the market is heading, or guarantee that another big drop such as that of last week will not happen again.

The Hang Seng Index has also lost more than 20% since November. This means investors may have already suffered substantial losses that make them reluctant to take on more risk by buying new companies without trading records.

ôInvestors would rather buy secondary market stocks which look much cheaper now,ö says another source close to the market.

Apart from SFK, real estate developer Changsheng China Property, department store operator Maoye International Holdings and solar power play Solargiga Energy Holdings all called off their Hong Kong IPOs last week due to the tough market conditions. And it wasnÆt only the Hong Kong listing candidates that were suffering. Budget airline operator Cebu Air cancelled its IPO in the Philippines early last week and, in Singapore, Indonesian timber products maker Samko Timber canned its proposed listing on Friday.

The failure of these six companies to complete their offerings is likely to discourage the listing candidates who are waiting in the pipeline, according to a source. Bookrunners are facing huge difficulties in terms of attracting enough investors to get their deals done, especially when they are working on sizeable offerings.

ôWhen a bulge bracket firm arranges a deal worth more than a billion, they (typically) have to get cornerstones to take up at least 30% of the book. But IPO-active tycoons are no longer interested in this game, as you can see on the recent IPOs. ItÆs hard for the bookrunners to get any cornerstones at the moment,ö says a syndicate banker.

Obviously the six companies that postponed their listings will not say when they might make a second attempt to raise funds in the market. At the moment, what most bookrunners are eager to see is the launch of at least one attractive play that can drive up the momentum of the IPO market again. That is, however, unlikely to happen before the Chinese New Year holiday, which starts next week.
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