As the world absorbs life with a slowing Chinese economy, business is brisk for one group — Asia’s bankers, handling a burst of stock listings by Chinese firms that need funds now and are resigned to their shares being worth less than before.
Although initial public offering (IPO) valuations might be cheaper, the pace of deals is accelerating. A review of upcoming deals showed an estimated US$17 billion for IPOs due for the last two months of the year in Asia, with a near-doubling of Hong Kong deals after China growth jitters cast a third-quarter pall.
Helped by Japan Post Holdings Co’s US$12 billion privatization — the country’s biggest in 30 years — Asia’s fourth-quarter IPO tally could be US$36 billion. That would make it the region’s best three months since fourth-quarter 2010’s record US$76.2 billion when China was in full flight, according to Thomson Reuters data.
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“Everything is being marketed in the context of slower growth” Morgan Stanley co-head of Asia Pacific Equity Capital Markets Mille Cheng said. “Investors want to use capital, but remain cautious.”
The rebound in deals has provided a much needed reprieve for fee-starved bankers after the third-quarter drought. Underwriting of IPOs and other equity deals account for about half of investment banks’ revenue in Asia, compared with 20 percent in the US and 19 percent in Europe, making it critical for their operations.
However, bankers said they expect deals in the pipeline for early next year are likely to reflect valuations staying low even for solid firms with decent prospects — a consequence of the new reality of a slower-growth China.
Hong Kong’s Hang Seng index remains 19 percent below a high for the year reached in late April.
“Sentiment has improved, but we’re not seeing a complete recovery yet,” Cheng said. “It has to be the right story and the right valuation.”
While South Korea, Australia and Thailand are set to remain comparatively steady IPO markets through the end of the year, the fourth quarter has already seen meaty Hong Kong deals from China Reinsurance (Group) Corp (中國再保險集團) and Huarong Asset Management Co (華融資產管理) — Chinese companies that want to raise funds for expansion.
Last weekend, China International Capital Corp (中金公司), the country’s oldest domestic investment bank, raised US$811 million in a Hong Kong IPO, at the top of a marketing range that was set modestly to lure, after the company made initial pitches on the deal to investors.
While investors are willing to buy, fund managers have been discerning about their bets, driving hard bargains even for strong brand names and consumer plays that are better placed to tide over the economic slowdown — as movie theater equipment maker IMAX China Holding Inc found to its cost last month.
IMAX China raised US$248 million in a Hong Kong IPO where shares had to be priced near the bottom of a marketing range, representing a price-to-earnings multiple of 24 this year compared with a sector median of 32, according to Thomson Reuters data.
With China’s own IPO market frozen since July after regulators tightened scrutiny of new listings to limit supply of new stocks, smaller markets such as Thailand and India are also reaping increased activity. Star Petroleum Refining plans a US$500 million deal in Bangkok, while an up to US$465 million offering is due from Indian budget airline IndiGo next month.
However, Hong Kong provides the mainstay. Upcoming deals include an up-to-US$1.3 billion listing by snack maker Dali Foods Group (達利食品集團) and a US$2 billion IPO by China Energy Engineering Corp Ltd (中國能源建設).
“Market performance has improved since the lows over the summer and companies are taking advantage of that to get deals done rather than waiting for further improvement,” said Goldman Sachs equity capital markets head Jonathan Penkin said.
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