Hong Kong: IPO pipeline blocked as investors remain nervous

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By:
Lawrence White
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Citic’s qualified success not a barometer for others; Issuers pull deals as sentiment weakens

Companies looking to launch an initial public offering in Hong Kong are likely to struggle to do so throughout the rest of this year despite the qualified success of the Citic Securities IPO, say equity capital markets bankers in the city. In the last weeks of September a number of high-profile deals were delayed or cancelled as markets weakened, and bankers say their deal pipelines are as full as they have been in years as companies queue up to come to market when conditions improve. Citic’s deal, which priced at the low end of the guidance range on September 28, showed that markets are not completely closed as they were in 2008 but the deal was always likely to succeed where others have failed.

Two down

Among the higher profile deals to collapse amid weak investor interest were the offerings of rivals Sany Heavy Industry and XCMG, both Chinese producers of construction machinery. Sany pulled its deal on September 22, having first tried to save it by extending the roadshow and pushing back the deadline for retail investors to participate.

XCMG too postponed its initial deadline and told investors it would proceed with a smaller deal, before eventually scrapping the IPO altogether. Sany’s deal was expected to be the larger of the two, raising about HK$26 billion ($3.34 billion), while XCMG was expected to raise the equivalent of $1 billion.

Bankers on the Sany deal said they would complete the roadshow anyway, so that the deal could be relaunched with investors already educated when markets improve.

A banker working on the Sany deal before its cancellation told Euromoney that he believed overseas investors would be interested in both companies, as a means of expressing a view that China would eventually increase fixed-asset spending – including heavy construction projects – as global conditions improved. With both companies already listed in Shanghai, a market to which foreign investors have limited access, the offerings in Hong Kong would allow investors to buy into the China construction story.

Unfortunately for the companies involved, the global market rout of the last two weeks of September soured investor sentiment to the point where both deals looked unlikely to secure enough interest. XCMG reacted with what one equity capital markets head at a bank not on the deal described as a "rush of blood to the head", pulling in six more banks to add to the six already on the deal in an attempt to secure enough backing to make the IPO a success. The banks included five Chinese firms and Goldman Sachs. The inclusion of the latter raised eyebrows, given that 11 banks were already working on the transaction and the fees for it were thus not expected to be high.

Steve Barg, co-head of equity capital markets Asia at Goldman Sachs, says his company saw the deal as an opportunity to build a relationship with an issuer. "The volatility in markets at the moment is creating issues for those who are trying to complete transactions, and opportunities for those with the capabilities to execute them in tough times," he says. "It shouldn’t surprise anybody that an issuer would want Goldman Sachs on their side."

Despite these late additions to the bookrunner roster, XCMG ultimately pulled its deal as investor sentiment weakened.

Poor quality

Other companies soon followed suit, including restaurant chain Xiao Nan Guo, which scrapped a $737 million deal despite covering the order book. Euroweek reported at the time that bankers on the deal said the poor quality of the order book, which could have led to those investors selling the shares immediately and thus harming secondary market performance, influenced the decision. Nanjing-based shoemaker Hongguo suffered this fate on September 23, when after heavy selling on the day of its $148 million IPO the shares fell 22%.

"Clients have de-risked and are more concerned about mitigating their downside and maintaining portfolio value than in sticking their necks out for a new IPO"

Dan Weil, Guosen Securities

Dan Weil, global head of institutional sales & trading at Guosen Securities

 

Equity capital markets bankers in Hong Kong are now drastically revising downwards their budgets for 2011, having realized that it will be very difficult to get as many deals done before the year ends as they had expected. "I am telling my guys not to put their pens down until it is decision day and that they have to keep talking with clients," says an equities head at a US firm. "The chances of a year-end rally sufficient to get some of these deals done are not high, but we’re at the point where some good economic news in the region might push Europe off the front page and give us some breathing room."

Other bankers echo the sentiment that it is macroeconomic news and global market volatility, rather than the investment story presented by any given issuer, that are the main factors in deciding whether a deal gets done. "It’s at least a novelty that my deal’s being screwed by macro," jokes a jaded-sounding equities banker over the phone on the day his deal got pulled. "Usually it’s because the chairman’s been in jail, or the company’s been caught spewing waste into a river somewhere."

Amid this gloom Chinese broker Citic Securities was able to get away its $1.7 billion Hong Kong offering. However, bankers say the company’s position as a top Chinese financial services house means its relative success does not offer an indicator for how other companies would fare. The deal had heavy cornerstone support from investors aware that the Chinese authorities would be grateful for their help in ensuring its success, as well as reported hard underwriting of the deal from the Chinese banks running the offering.

"Citic getting done or not has no bearing on my deals, because they’re in a parallel universe," says a capital markets banker not involved in the transaction. "There’s no way China would let the deal fail. Citic’s a leading brokerage house with which investors have an interest in maintaining top-quality relations, and the funds that you saw going in know that they’re currying favour with Beijing by ensuring its success."

Good news needed

Despite investor reluctance to buy China equity offerings at the moment issuers are still preparing to go ahead, with deals from insurer New China Life and Haitong Securities among those in the market. Investors know valuations are cheap and some of these deals offer attractive opportunities, but it might take some good news from Europe for a genuine rally to occur.

Dan Weil, global head of institutional sales & trading at Guosen Securities, says: "Clients have de-risked and are more concerned about mitigating their downside and maintaining portfolio value than in sticking their necks out for a new IPO."