In an interview conducted before last Friday's downgrade of the US by Standard & Poor's, Citi's Ed Lam spoke to us about the outlook for investment banking activity. Although primary markets activity is on the back burner at the moment, there is still an active pipeline of issuers waiting to tap the market and a good chance that deal flow will resume soon.
What is your outlook for primary capital markets issuance in Hong Kong in the second half?
Investors remain very selective but high-quality IPOs [initial public offerings] will still get done as underlined by the recent Sun Art IPO here in Hong Kong, which was also the best performing IPO for the first day so far in 2011 for Hong Kong.
Interestingly larger-size IPOs with more liquidity seem to be more receptive to investors than smaller deals right now. Strong names, with strong management continue to attract interest but there is definitely a move toward bigger-sized transactions to ensure liquidity.
But the market remains very volatile and investors are looking for cash flow and growth, as well as a proven business model and execution track record.
Bonds, especially renminbi bonds, are getting issuers’ attention. Bank liquidity continues to tighten, and issuers are getting ready to tap the bond market with medium-term note programmes or preparing to take advantage of windows of opportunity with renminbi and various other currencies. We also expect to see key Hong Kong corporations and financials access the international debt capital markets to raise cost-effective capital.
In terms of the macro outlook, US growth will be slow, but liquidity is there, and corporations are hopeful that investors will come back to the market. But the European national debt issues remain a lingering concern.
Are you expecting more international companies to list in Hong Kong? What other trends do you see coming?
More and more international companies will be listed in Hong Kong in the next 12 to 18 months. Hong Kong does provide a deep IPO market and liquidity, and Hong Kong is more of a price-to-earnings driven market. Other than international companies, many Asian corporations will gradually move their foreign listings back to Hong Kong. We are having numerous conversations with global companies about listing in Hong Kong. Hong Kong’s IPO market is now one of the most attractive listing venues in the world.
Will Hong Kong ever be a key M&A hub for Asia-Pacific...what are your expectations for inbound and outbound M&A?
Things are certainly moving in the right direction. Hong Kong corporations are flexing their muscles and have ready access to capital to support key transactions if financing is needed.
The Hong Kong M&A market is more active now, with cross border M&As, (take, for example, CKI and Noble), in-bound acquisitions (consider Mongolia Mining’s acquisition of Kerry Mining’s assets, Mapletree’s acquisition of Festival Walk) and domestic transactions, such as TVB.
We believe a lot of cash-rich Hong Kong corporations with global operations or significant China operations will take advantage of the current market environment and make strategic acquisitions. We would expect more headline transactions from Hong Kong in the coming weeks and months.
Where is your focus right now?
Now that Citi has combined and fully integrated Hong Kong corporate banking and investment banking under one team [Ed Lam assumed the role of Head of Hong Kong global banking in July] the priority is to make sure we are even more heavily involved and in the middle of these key flows and transactions that I described earlier across capital markets and advisory.