Hong Kong Has Tough IPO Road Ahead - Wall Street Journal

By Prudence Ho

Hong Kong has a shot at regaining its initial-public-offering crown, with at least US$9 billion worth of deals in the pipeline.

But bankers will have to overcome negative sentiment as investors continue to see new listings underperform, and at the same time compete for roles in IPOs against a plethora of underwriters jostling for fees.

Hong Kong was the top venue for IPOs globally for three straight years from 2009 to 2011, according to data from Dealogic, buoyed by large Chinese listings. It lost the title last year, and this year, with just $1.02 billion in new listings, it is in eighth place, well below market leader New York’s $5.21 billion.

Disillusionment with IPOs that failed to perform, as well as a few high-profile scrapped deals, led to few new deals coming to market. London jeweler Graff Diamonds Corp. scrapped plans for a $1 billion IPO in Hong Kong last year because of souring sentiment toward new listings, while Beijing-based China Everbright Bank Co., which is looking to try to list sometime this year, had made two attempts to go public in Hong Kong in the past couple of years.

Recent Hong Kong IPOs haven’t done much better. Six of the nine companies that have listed in the city this year are trading below their IPO prices and underperforming the benchmark Hang Seng Index.

“IPOs need to offer either high dividends, or high growth prospects with a reasonable valuation” to convince investors, who have been shaken by the poor performance of new listings, said Alex Au, managing director of Richland Capital

Management Ltd., a pan-Asian hedge fund based in Hong Kong.

Last year’s biggest Chinese IPO has bucked the trend of underperforming new listings. People’s Insurance Co. (Group) of China Ltd.’s (1339.HK) US$3.1 billion IPO in December is up 24% from its listing price, but it is merely a blip in a sea of declines. PICC priced the deal near the bottom of the indicative price range, reflecting a less aggressive pricing strategy.

China’s largest property-casualty insurer by premiums had a record 17 banks advising on the IPO. A forthcoming IPO this year, a $1.5 billion deal by China Galaxy Securities, continues that trend; it has more than 14 banks working on

its Hong Kong listing, people with direct knowledge of the deal said. In contrast, when Agricultural Bank of China Ltd.  raised US$22.1 billion ahead of a Hong Kong and Shanghai listing in July 2010 in China’s biggest-ever IPO, there were 10 bankers on the deal.

PICC was a game-changer for banks not just for the number of underwriters on the deal, but also because roles–whether senior banker roles or junior underwriters–were assigned only at the last minute. This strategy encourages bankers to get as many orders as possible, because the number of orders they bring in determines their status and potential fees, people familiar with the matter said.

All of this stands in contrast to the region’s new hot market for IPOs: Southeast Asia. Mapletree Greater China Commercial Trust, a unit of Singapore state investment firm Temasek Holdings Pte. Ltd.’s real-estate arm,

which listed in March, had just four banks on its US$1.3 billion Singapore IPO.

“The listing assets brought to the market [in Southeast Asia] are expected to deliver promising financial results, so investors are therefore more willing to pay a premium for it,” said David Gaud, Asia ex-Japan fund manager at Edmond de Rothschild Asset Management in Hong Kong.

Still, there is a huge list of companies set for Hong Kong listings this year. Apart from Galaxy Securities, Hong Kong is looking forward to an up to US$1.5 billion IPO by Chinese lender China Everbright Bank Co. ; a US$1.5 billion deal

by Sinopec Engineering (Group) Co., an engineering unit of state-owned China Petrochemical Corp.; and Hong Kong-based New World Development Co.’s $1 billion carve-out of its domestic hotel and property assets.

Hong Kong Has Tough IPO Road Ahead - Wall Street Journal