HONG KONG'S INITIAL public offering market has always been idiosyncratic. And with massive liquidity chasing the local market since the economy turned smartly from its Sars-induced funk in the first half of 2003, the heat behind demand for Hong Kong new issues, particularly China plays, turned from lukewarm to white hot.
In the first quarter of this year, new records were set for subscription levels for retail tranches, which commonly hit several hundred times the amount offered. In some offerings, many of the more than 200 local retail brokers, who make a good living providing significant margin financing to retail punters looking to stag the next hot deal, drew down their facilities with local banks to their limits.
Dealogic data indicate that 42 IPOs in 2003 raised just US$1.04 billion. In the first quarter of 2004, by comparison, 15 IPOs netted US$3.06 billion. It's an impressive performance, but not one that is likely to be sustained, since several questionable offerings in Hong Kong's frenzied market for new issues have queered the pitch for future issuers. Amid lacklustre demand for China new issues, the back-draught from the IPO flame-out has already singed several debutants and the list of China IPO casualties continues to grow.
One of the first deals to suffer was Hong Kong cellphone operator China Resources People's Telephone – People's Phone – and its underwriter, UBS. Having been launched in what were already choppy markets, the IPO closed heavily undersubscribed and UBS was faced with a difficult decision.
"Hong Kong IPOs are a bit like juggernauts," says Marcus Brown, head of equity capital markets at UBS. "They take 200 yards to stop. The ability to resize and re-price [quickly] just isn't there. So there are really only three things you can do. You can get the deal done; you can try to postpone, resize, reprice and relaunch a couple of weeks later; or you can sit there and wait for sunnier times. That can take two, four, six months – who knows?"
UBS bites the bullet
UBS took what was perhaps the bravest decision: it got the People's Phone deal done. With some rapid footwork, a helpful stock exchange and some generous corporate investors, the offering went ahead – just. Having reduced the retail offering to 5% from the usual 10%, UBS placed almost 74% of the institutional offering with only seven corporate investors. Just under 18% of the same tranche ended up in the hands of institutional holders. Perhaps most significantly, UBS took up 8.4% of the international placement for its own account. Brown admits that the deal allocation was less than ideal.
"Of course, we don't like the concentrated shareholder base," he says. "Is it a normal IPO share register? No. Are the investors fully aware of the basis upon which they've gone in? Absolutely."
Thanks to generous pricing (the People's Phone shares were eventually priced on a yield of 6.4%), UBS is probably happy with its decision to proceed. In addition to keeping an important mainland China client sweet, the shares rebounded from a poor start and climbed above the offer price, which had admittedly been reduced.
Despite the softer market into which UBS launched the deal, Brown insists that this was not the reason the issue initially ran into trouble. "We got side-swiped not so much by the decline in the market," he says. "What hit us most was TOM Online and SMIC. Retail has been an incredible influence on the success of deals. SMIC was down 22% from pricing and TOM Online down 24.5% in just one or two weeks. That basically took the sentiment out of the market and we got caught by that."
TOM Online, an internet spin-off from the TOM Group, owned by Hong Kong billionaire Li Ka Shing, was launched in early March by Citigroup and Morgan Stanley. Almost 100 times subscribed at the retail level, the issue was priced at the top of the range, valuing the internet portal, which provides wireless value-added services, online advertising and commercial enterprise solutions, at about US$750 million, more than four times book value. The shares opened below the issue price on the first day and have never recovered. Although TOM Online was issued into what was still a strong IPO market, the deal was panned by market practitioners.
Ironically, another earlier Citigroup deal for Li Ka Shing might have played a part in the downfall of his TOM Online issue.
In late January, in what proved to be a highly controversial transaction, Li's company Hutchison Whampoa sold its fixed-line telecommunication businesses in Hong Kong to a listed associate, Vanda Systems and Communications, to be renamed Hutchison Global Communications in an all-share deal that made Hutchison's stake in Vanda significantly bigger.
After the conditional transaction was announced, the Vanda share price was bid up strongly by local retail investors frantically seeking a piece of another Li Ka Shing investment vehicle. Within days, Citigroup placed large amounts of Vanda stock on behalf of Hutchison, netting the conglomerate huge one-off gains, crippling the share price and leaving a large number of retail punters nursing serious losses.
Mention the Li offerings to Fabrice Jacob, managing director at Hong Kong and China smaller companies fund manager MYM Capital, a frequent investor in local IPOs, and it is hard to get him to stop laughing. "TOM Online – that was a big joke." he says eventually, still chuckling. "Coming straight after the Vanda deal. Li Ka Shing is responsible for a big chunk of the sour sentiment."
Darius Yuen, head of equity capital markets at investment bank BNP Paribas Peregrine, agrees. "The Citibank deals really hurt the market. Not just TOM Online but also HGC – the Vanda deal."
Jaded retail appetite
According to Yuen, the effect of the two issues on retail appetite explains the poor performance of subsequent IPOs. "People shouldn't underestimate the power of retail – that's all evaporated," he says. "We saw that in the Lifestyle IPO [a recent BNP Paribas Peregrine-sponsored IPO of a well-known retail business]. The subscription was nowhere near what we expected. Our Lifestyle IPO was priced on April 8 and the market's dropped since then, so at the moment sentiment is very poor."