Small IPOs lead the revival in Hong Kong

By:
Kanika Saigal
Published on:

The IPO market in Hong Kong is off to a strong start this year following the success of small IPOs such as Speedy Global, signalling the return of the retail investor.

Hong Kong’s IPO market bounced back in January with a bout of successful listings and retail interest, pointing to a recovery in the market.

Speedy Global, a raw material and logistics supplier based in Guangdong, raised HK$123 million through its January 15 IPO and closed 39% higher than its offering price. Hong Kong toy manufacturer Quali-Smart, which launched its IPO on January 23, raised HK$90 million and closed at HK$1.66 per share, marking an 11% increase in its subscription price.

Looking ahead, Chinalco Mining Corporation is set to price its Hong Kong IPO at HK$1.75 per share in order to raise HK$3.1 billion, according to Reuters. The stock is due to start trading at the end of January. BNP Paribas and Morgan Stanley will act as joint coordinators on the deal.

In 2012, there were 62 new listings raising HK$89.8 billion, down 67% on 2011. But according to research by KPMG, funds raised for IPOs in Hong Kong are set to reach HK$125 billion in 2013.

“There's definitely more confidence about the prospects for Hong Kong IPOs,” says Tom Lanners, co-head of ECM for Asia Pacific at HSBC. “[It is] being fuelled by a sense that the worst of the macro fears over Europe and China have passed, and the decent performance of some recent landmark offerings.”

 
PICC Chairman Wu Yan at an investors meeting in
Hong Kong in November
The recent flurry of successful IPOs follows PICC’s landmark issue last December. The Chinese insurance company successfully raised HK$21.01 billion with shares up by 7% on the second day of trading. The IPO was the largest to come out of Hong Kong in two years.

However, it is the small and successful IPOs such as those issued by Speedy Global and Quali-Smart which illustrate that a rebound in the market is real.

Traditionally, the Hong Kong IPO market is retail-centric but global economic uncertainty saw this fall by the wayside in 2012. “Cornerstone investors were needed because retail demand was pretty weak, and big IPOs like PICC... performed well as they were able to secure a number of high profile cornerstone investors," says Paul Lau, partner at KPMG based in Hong Kong.

More than 60% of the PICC IPO was secured before the roadshow by 17 cornerstone investors as negative investor sentiment impacted retail interest in the tranche. Bankers say the principal reason PICC drafted 17 bookrunners to work on the deal was in order to reach as many investors as possible.

“As opposed to the PICC IPO, where the company called in favours in something more akin to a friends and family operation rather than a normal IPO, smaller issuances in Hong Kong are attracting a wider range of investors, are working well and trading well. Investors have become a lot more confident,” says an ECM banker.

However, cornerstone investors will continue to play a central role in major IPOs and have not lost their importance in Hong Kong, says Lanners. “[Cornerstone investors] help to reduce execution risk for the issuer by giving the broader market confidence that the deal is well supported. But while they are vital to most IPOs – especially larger ones – a truly successful deal still depends on building on the cornerstone tranche by generating good momentum in the market," he says. 

Block trades

While the IPO market in Hong Kong is beginning to show signs of revival, the Hong Kong Stock Exchange has, like its many of its counterparts, seen relatively strong activity in quicker block trades. “Globally, block trades are playing a bigger part in the current equity landscape because proportionally, IPOs have performed badly,” says the global head of capital markets at a European bank.

Nevertheless, Lau of KPMG predicts an unpswing in the IPO market. "As market sentiment improves in 2013, the IPO market will pick up its pace although block trades will likely have another strong year," he says. 

But don’t expect a return to the heydays when IPOs accounted for 70% or more of equity volume in Hong Kong, says Ian Long, head of China ECM at Deutsche Bank. “Block trades will continue to perform well into 2013 and beyond.. But we do hope to see a better balance between IPOs and block trades this year."

But he warns: "There is a certain level of exuberance in Asia at the moment surrounding IPOs that will likely moderate."