Summer is normally blockbuster season for the global movie industry and in Hong Kong, it will also be the case for initial public offerings, with both Xiaomi and China Tower preparing to clear their deals in July before investors head off for their annual vacation.
Given both offerings have been flagged around the $10 billion mark, it means that just these two deals alone should beat the $19.44 billion in total IPO proceeds that Chinese issuers have raised onshore and offshore during first five months of the year according to Dealogic figures.
It is shaping up to be a busy summer, with bankers and fund managers expecting other Chinese-domiciled issuers to raise a further $3 billion to $5 billion on top of this during the course of June and July.
Bruce Wu, co-head of Greater China equity capital markets and vice chairman of Japan origination at Citi told FinanceAsia: “Activity started increasing in mid-May and as we come into June and July, it’ll step up another level again both in terms of the number and the size of deals.”
Can the markets cope with this huge uptick in issuance? On the plus side, Hong Kong equity indices remain among the few still in positive territory around the region. As of Tuesday’s close, the Hang Seng China Enterprises Index was up 4.7% year-to-date.
Citi’s Wu also notes that there is plenty of liquidity and believes that as long as the pipeline is “well distributed globally, there’s no reason why it can’t be absorbed".
But he adds that “investors are being presented with a lot of choices at this IPO banquet, so pricing will need to be competitive to keep them interested".
Investors are also being offered new deal structures thanks to regulatory changes on both sides of the border, which are profoundly changing the way that both Hong Kong and Mainland China’s equity capital markets operate.
As a result, Foxconn Industrial Internet’s (FII) $4.26 billion flotation was not only Asia’s largest IPO in May according to Dealogic figures, but also a game changer for the Shanghai Stock Exchange.
Its speedy approval process (five weeks rather than the standard one to two years), valuation (benchmarked against international comps at 17.2 times 2017 earnings) and use of cornerstone investors (30% of the total), have brought Chinese IPO practices more in line with Hong Kong’s.
However, since domestic comparables are trading at much higher levels, the CICC-led deal will almost certainly trade up when it lists on June 8 given the regulator’s 23 times trailing earnings cap still remains in place.
Cornerstones may also not turn out to be one of China’s best imports over the longer-term if they mirror Hong Kong’s experience of distorting pricing.
In FII’s case, it could be argued that the BAT troika (Baidu, Alibaba, Tencent) participated because they are interested in the company’s industrial Internet potential. But their enthusiasm can just as easily be attributed to a desire to gain some government brownie points, making them much more like a friend and family investor.
And even when cornerstones are true institutional investors, there is no more of a guarantee that a deal will trade up in the secondary market as Ping An Healthcare & Technology’s IPO has demonstrated. As table 1 shows, its $1.18 billion Hong Kong deal ranks as the worst performing flotation above $50 million that began trading in May.
At the other end of the spectrum in May, was HUYA Inc’s $207 million IPO. Its share price doubled within a couple of weeks of listing on the New York Stock Exchange.
The Chinese live streaming platform has been benefiting from renewed enthusiasm towards the sector, which is also boosting recently listed comparables such as iQIYI and Bilibi. However, Smartkarma analyst Toh Zhen Zhou says: "Investors might be getting a tad too bullish assigning a large premium to HUYA relative to other streaming sites.”
|Company (in order of performance)||Exchange||Offer Price||Trade Date||Performance % (to end May)||Bookrunners|
|HUYA Inc||NYSE||12||11-May||112.08||Credit Suisse, Goldman Sachs, UBS|
|PT Bank Tabungan Syariah||JSE||975||8-May||58.97||Ciptadana|
|China 21st Century Education||HKSE||1.13||29-May||49.56||China Securities, Head & Shoulders, Morton, ABC, China First Capital|
|PT Bank BRISyariah||JSE||510||9-May||22.55||Bahana, CLSA, Danareksa, Indo Premier|
|PT Sarimelati Kencana||JSE||1100||23-May||11.82||CLSA, CIMB|
CHANGE OF VENUE
Analysts estimate that 75% of June/July’s Chinese offshore new issuance activity will be New York-centric (excluding the two mega IPOs). Over the short term, at least, the US will continue to be a vibrant fundraising arena for Chinese companies.
But the pendulum is clearly swinging towards exchanges closer to home thanks to the recent regulatory changes towards biotech and new economy companies. Citi's Wu notes how Chinese life sciences companies, which would previously have chosen the US, are filing to list in Hong Kong instead.
Again analysts predict about $2 billion worth of IPOs from the sector by year-end, led by Ascletis Pharma and Liaoning Cheng Da, which have already filed with the stock exchange of Hong Kong (HKEx). How will they fare?
“I think we’ll have a better picture by the end of 2018 once the first wave are listed," Wu said. “Hong Kong is now open for business, but it will take time for both the buy-side and sell-side to build up the right level of industry expertise to make Asia the most attractive listing venue.
“Right now most Asian fund managers don’t have a life sciences expert sitting alongside them as they would do in the US where there’s far greater depth of knowledge and more peers to benchmark against,” he added
In the meantime, Xiaomi’s forthcoming jumbo IPO will be the first to deploy a dual-class shareholding structure and is expected to clear the HKEx listing committee this Thursday, with pricing tentatively scheduled for July 9.
The smartphone manufacturer is also bringing a new twist to an old concept: encompassing a dual listing in Hong Kong and China with a common share and depositary receipt (DR) format – the twist being the replacement of an ‘A’ with a ‘C’ in front of the DR.
In many ways, the deal will have a very similar structure to the dual listings Korea and Taiwan tech companies used in the late 1990s and early noughties when their homes markets restricted foreign ownership.
Joint sponsors for the Hong Kong IPO are CITIC CLSA, Goldman Sachs and Morgan Stanley with CITIC Securities in charge of the CDR.
Goldman, alongside CICC, is also a joint sponsor for China Tower Co, which is also now hoping to price this side of the summer and filed its listing application one week after Xiaomi. In a recent research report, Citi’s tech analyst, Bin Yiu, assigned the group a DCF-based valuation of Rmb360 billion ($56.17 billion).
UPSIDE DOWN CAKE
Around the rest of Asia, the secondary market performance of May's IPOs underscores the old adage that the best time to buy a deal is often when other investors don't want to.
The recent spate of IPOs from Indonesia generally struggled during the primary market thanks to a broad emerging markets sell-off, which hit current account deficit nations like Indonesia hard. The Jakarta Stock Exchange Composite Index remains Asia’s second worst performer for the year to Tuesday's close (down 4.2%) despite a brief respite in late May.
However, the deals have generally faced a different reception in the secondary market, particularly the two recent Islamic banking deals for PT Bank BRISyariah and PT Bank Tabungan Syariah. Both have risen strongly since they began trading in early May.
By contrast, the shine has come off Asia’s recent stock market darling, Vietnam. Investors’ enthusiasm finally outpaced valuations leading to the almost inevitable pull back. As a result, the country’s largest ever flotation – a $1.349 billion deal for Vinhomes – has struggled to give investors much of a return since it began trading in the middle of the month.
In a subsequent article, FinanceAsia will examine trends in secondary market offerings where yield plays have been ruling the day.