By Rashmi Kumar
Illustrator: Ben Jennings
Jasmine Cui was in panic mode in late January as details of the coronavirus pandemic in China emerged.
The co-founder, president and chief executive of Chinese company InnoCare Pharma was all set to take her five-year-old company public on the Hong Kong Stock Exchange in February.
Cui’s original plan had been to start the analyst roadshow in the first week, kick off the management roadshow in the middle of the month and list by the end of February.
But the rising number of Covid-19 cases and the lockdown that ensued in China disrupted those carefully laid plans.
Cui held calls with her IPO sponsors, Goldman Sachs and Morgan Stanley, nearly every day from the end of January to discuss whether to go ahead as planned or wait and see what impact the virus would have on markets.
Uncertainty over how long the Covid-19 crisis would last and the havoc it could create forced the cancer drug developer to delay its deal by a few weeks to the middle of March.
Jasmine Cui, InnoCare Pharma
“Our theory was to prepare for the worst,” says Cui, speaking to Asiamoney in the middle of May, about two months after InnoCare made its debut on the Hong Kong stock market with a blowout HK$2.6 billion ($332 million) IPO.
InnoCare, which capitalized on investor interest in the healthcare sector during the coronavirus outbreak, was the first sizeable listing on the exchange where bookbuilding happened entirely virtually. It was also the first to make its debut in Hong Kong with a virtual listing ceremony.
“We initially wanted to hold a proper listing ceremony, but it was impossible for me to travel,” says Cui, who is based in Beijing. “We spoke to the marketing department of the HKEx and others and they were all very supportive of the idea of a virtual listing ceremony.”
InnoCare was an important deal for the region’s equity capital markets, as it showed that IPOs – which typically require roadshows with pit stops across Asian and European cities – could be done virtually.
It ushered in virtual bookbuilding for deals and online roadshows as countries around the world locked down. With flights grounded and strict quarantine rules in place, traveling in and out of most countries was almost impossible from February onwards.
The government of the Hong Kong Special Administrative Region kept a tight grip on the number of Covid-19 infections by enforcing stringent social distancing measures and ordering non-essential employees to work from home, but it did not resort to a full lockdown.
For investment bankers and investors, that meant setting up their home offices with multiple screens and juggling work and childcare. For the management teams at corporations, it meant working from home, halting manufacturing temporarily, and seeking advice from bankers on how to navigate the volatility.
It also meant making difficult calls on whether to go ahead with a capital markets deal virtually, or to postpone fundraising plans by a few weeks to take stock of the situation. Nobody pulled deals: like InnoCare, they just waited a couple of additional weeks before hitting the market.
Many of Hong Kong’s bankers and investors had already had a taste of working from home last June when protestors took to the streets, often targeting the city’s business district.
The demonstrations started off in protest against a proposed law – which was eventually scrapped – to allow extraditions to mainland China, but they later morphed into an anti-China, pro-democracy movement. Riot police used tear gas to break up the crowds.
Despite the turmoil, the special administrative region’s capital markets remained open.
Among the landmark deals to go ahead was the secondary listing of Alibaba Group Holding in Hong Kong. The deal roadshow kicked off in early November 2019, just days after demonstrations brought Central, the business district, to a standstill.
The Chinese e-commerce firm showed its savvy by replacing face-to-face investor meetings with phone calls when many people were unable to get to their workplaces. The secondary listing, equivalent to nearly $13 billion, was Hong Kong’s largest IPO in about a decade.
When Covid-19 struck this year, Hong Kong’s bankers and investors were better prepared than those elsewhere for the practicalities of not working at the office.
Sheldon Chan, a Hong Kong-based associate portfolio manager in T Rowe Price’s Asia credit bond strategy team, says staff in his firm had been offered the option of working from home from February, when the first cases of the virus started to emerge in the territory.
Sheldon Chan, T Rowe Price
As the number of cases started to rise in March, pretty much everyone in Hong Kong, bar essential workers, operated from home. The rules started to be relaxed in early May, when bankers and investors started to return to their offices.
In May, T Rowe Price split its Hong Kong staff into two teams, Chan says. The teams worked alternate weeks in the office, with staff divided up based on their functions and on how they were seated in the office so they could stick to the new social distancing norms.
“It’s a safety-first approach – making sure the office is not more than 50% occupied at any given point in time,” Chan adds. “We have adopted a gradual phase-in policy in Hong Kong.”
The practice was due to end in June.
Chan says that working from home has been fairly smooth for two reasons. The first is that T Rowe, as a global investment fund manager, has offices around the world, so its staff are accustomed to using technology to communicate and work together: being at home did not hamper that communication flow or hinder getting sign-offs to make investments.
With banks and syndicate desks, a lot of the dialogue happens over Bloomberg chat systems or through email, and this continued when staff were working remotely. Secondly, Asia’s debt market hasn’t seen much issuance from debut, high-yield companies, which require more due diligence. In those cases, face-to-face meetings with the management are still considered essential for the deal’s success.
Meetings with the management team are very important in getting an impression of the company and their strategy – it’s a key part of the decision-making process. In the absence of face-to-face meetings, video is absolutely the way to do it- Sheldon Chan, T Rowe Price
“For us, as an active fund manager, we’re focused on the fundamental story,” says Chan. “These meetings with the management team are very important in getting an impression of the company and their strategy – it’s a key part of the decision-making process. In the absence of face-to-face meetings, video is absolutely the way to do it.”
Rob Mumford, investment manager in GAM Investments’ emerging markets equity team, says that his team is equipped to work from home efficiently, largely because they are used to being on the road constantly and getting work done remotely. This means they have long been set up with access to the necessary software, and they know how to use it.
Mumford says that GAM’s investment framework includes looking at the macro environment, the company’s position in its industry, valuations and broader risk, including environmental, social and governance risks. These are mainly based on a lot of documentary research and evidence.
“Then you have the face-to-face meetings where you get a bit more flavour,” he says. “But it is flavour rather than a necessity.”
Cui of InnoCare Pharma says that before heading into the IPO, her team was prepared for two possibilities: that pricing would be lower than originally indicated, and that they would need to rely more on cornerstone investors.
The company launched its IPO at a price range of between HK$8.18 and HK$8.95 a share, or slightly below its initial guidance.
More than 60% of the deal was first put in the hands of cornerstone investors, including healthcare-focused investor Vivo Capital, as well as investment house Matthews Asia and Chinese state-owned China Structural Reform Fund. But that was cut to 50% in the end after the retail portion was covered about 300 times. The deal was priced at the top of the range.
InnoCare’s IPO took place during a time of extreme turbulence in the US stock market. Market plunges triggered the circuit breaker – which halts trading temporarily to give investors a breather – on the S&P500 four times on March 9, 12, 16 and 18.
When the circuit breaker is triggered on the S&P500, trading also halts on both the Dow Jones Index and the Nasdaq.
InnoCare held its virtual bookbuilding from March 11 until March 16. Much to Cui’s surprise, interest was strong and the IPO was covered within hours.
There is a crucial caveat to those heralding InnoCare’s IPO as an example of what can be achieved. The company had more than 300 face-to-face investor meetings from June 2019 as part of the groundwork ahead of the listing. Those meetings were as much as nine months old by the time it listed, but they undoubtedly helped. When the time came to launch the transaction, virtual bookbuilding worked well for InnoCare because investors still remembered the company and its story.
In the beginning, we were very nervous and were prepared for the worst. But when we saw the investor interest after the first day, we were thinking that our IPO wasn’t challenging enough, so we were quite relaxed- Jasmine Cui, InnoCare Pharma
The firm also approached potential cornerstone investors last year, and there were follow-up calls with them to seal the deal ahead of the IPO launch.
Even though the foundations were laid during those physical meetings, that does not detract from InnoCare’s success in running virtual roadshows and its nimble execution. During the live bookbuilding, InnoCare’s syndicate team still had to rely on a combination of conference calls and video calls to drum up interest for the IPO, whereas bankers would normally expect to be on the road while building the book.
When InnoCare made its virtual debut on the HKEx, its stock soared over 10% on the first trading day. By late May, its share price had risen an impressive 68%.
“In the beginning, we were very nervous and were prepared for the worst,” admits Cui. “But when we saw the investor interest after the first day, we were thinking that our IPO wasn’t challenging enough, so we were quite relaxed.”
InnoCare’s virtual IPO inspired other issuers to try out online bookbuilding in Hong Kong.
Sizeable deals include Central China New Life’s $265 million listing, Kintor Pharmaceutical’s $240 million deal, Peijia Medical’s $302 million IPO and Akesobio’s $383 million transaction: all of them held virtual roadshows for their listings.
Vanessa Koo, Barclays
Vanessa Koo, head of banking for Asia Pacific at Barclays, says that the inability to have face-to-face meetings with investors has not impacted deal pricing; instead, the biggest problem has been conducting due diligence.
“There are aspects of diligence that are impacted by the inability to travel and cannot be mitigated, so for example, deals that require site visits have been pushed back,” says Koo. “But we just rely more on technology and video conferencing for other due diligence requirements. That has worked fine, and particularly when we work with clients that we’ve covered, we haven’t missed a beat.”
Koo faced her own personal challenges too when it came to working from home. She had foreseen travel restrictions due to the pandemic, which meant she spent most of February traveling to Barclays’ offices in Singapore, Tokyo and Sydney. When she returned to Hong Kong to work from home, she discovered her neighbour was in the middle of a home renovation and so she had to put up with the noise of drilling in the background.
Christopher Laskowski, Citi’s Hong Kong head of corporate and investment banking, says that there have been no real issues around executing investment grade deals, apart from occasionally hearing a baby or a dog in the background during a pricing call.
But running high-yield or debut deals, or transactions with convoluted structures, as well as IPOs, is tougher.
There are aspects of diligence that are impacted by the inability to travel and cannot be mitigated, so for example, deals that require site visits have been pushed back- Vanessa Koo, Barclays
Take the example of a $600 million, 10-year debut bond sold by Xiaomi Best Time International on April 22. The note was guaranteed by parent Xiaomi Corp, a Chinese internet company that produces smartphones.
The deal, with a 3.375% coupon, was priced at 98.745 and a yield of 3.525%. But the bond didn’t perform strongly in the secondary market. By the middle of May, it was trading slightly under water.
T Rowe Price’s Chan suggests a few reasons for the underperformance: renewed US-China trade tensions and the impact on the technology sector, as well as the fact that the company is not an established name in the credit markets.
Christopher Laskowski, Citi
But while Xiaomi could still get a deal away due to its brand recognition, smaller, high-yielding industrial names will find it an uphill battle.
On the equity side, Citi has been busy turning some of its IPO deals into pre-IPO transactions until the timing for a flotation is right, given that equity markets have been volatile, particularly for new listings.
“A pre-IPO or private placement is easier to get your head around,” says Laskowski, “because you have a prospectus completed, and it is typically for primary money to grow the underlying business. Private equity firms are willing to bridge a company until it is IPO is ready. These deals also tend to have some structural downside protection.”
For example, Chinese artificial intelligence startup SenseTime Group was initially planning a listing for this year, but Asiamoney understands it scrapped the IPO in favour of a private deal.
Another Chinese AI company, Megvii Technology, received approval for its Hong Kong IPO from the bourse in January, but the deal has still not gone ahead: its prospectus expired at the end of February and so far it has not refiled its updated listing documents.
A pre-IPO or private placement is easier to get your head around because you have a prospectus completed. M&A trades are another matter in China. Investors want to understand the seller’s motivation and get to know the management- Christopher Laskowski, Citi
For mergers and acquisitions, where face-to-face meetings are crucial for sealing the deal, especially in a market such as China, banks have found it tougher to do business.
“M&A trades are another matter in China,” Laskowski says. “Investors want to understand the seller’s motivation and get to know the management, which requires face-to-face meetings. Plus, people need to do physical inspections of plants and facilities, which can prove difficult. We have several transactions that are being delayed until things improve.”
He declined to give names or further details.
Working from home is not an option in such cases. But the use of technology has shown time and again that a big part of the investment banking business can be done remotely in Hong Kong.
For the most part, many people who work in the capital markets have embraced technology and doing deals from home. Some even find it more efficient to hold video calls with clients one after another – and from the comfort of their homes, rather than traveling through multiple cities for just a handful of meetings.
“If this situation happened 10 years ago, it would have been a lot more difficult,” says GAM’s Mumford. “But thanks to the pace of technological progression and with new 4G and 5G technology, it’s going to make this type of video interaction a lot more common.”
More importantly, he adds, this phase reduces some of the stigma associated with working from home.
Having seen that people can work efficiently from home, and that the relevant technology is in place to allow that, there will be more acceptance of flexible working, he adds.
InnoCare’s Cui says that her team held non-deal online roadshows in April with investors to discuss the firm’s 2019 annual results, when she found herself getting more comfortable with audio and video calls.
However, she adds that when the Covid-19 situation improves, she would “love to catch up with investors in person”.
There is no guarantee that life will go back to normal for those working in Hong Kong. In May, China’s government announced that it would impose a security law on the special administrative region, leading to a sharp rise in protests and a return to the chaos that market participants were forced to endure before the coronavirus.
Even so, investors think roadshows could be changed for good. At the very least, bankers and issuers may be more eager to use technology to spread their message.
There could be a greater reliance on NetRoadshow, an online communication tool that has long been used ahead of roadshows for capital-raising events. Issuers use the platform to publish slides and financial highlights, but little else.
They could make greater use of video in their virtual roadshows, while still meeting investors in person to face the hard questions, says Chan.
“That way, when you actually do the roadshow in person, it’s a punchier call; you can get down into the nitty-gritty, without having to hear the high-level highlights that you already know,” he says. “We haven’t seen that yet, but it’s a way of stepping things up.”