China’s equity juggernaut rolls on

  • 28 Jan 2008
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A little of the sheen came off a glittering year for Chinese equity issuance at the end of 2007. But despite small signs of reticence, the appetite for new deals appears vast. Can China’s prodigious economy continue to grow rapidly and supply such copious global equity issuance, asks Mark B Johnson?

Offshore equity issuance from China last year, excluding ‘A’ shares, ballooned to $70.9bn, up 30% from $54.2bn in 2006. Almost every equity deal for most of the year was highly oversubscribed by both institutional and retail buyers.

This demand translated to a 132% increase in deal volume from 2005 and it will likely finish about 800% higher than the $7.74bn in 2003. That was just four years ago but the environment has changed completely — in the early part of this decade, Chinese equity deals were often a tough sell, even on what were then low, sometimes near giveaway, valuations.

With no gigantic deals in 2007 the offshore market for new Chinese company issues was made up of a host of medium sized deals of $200m-$1bn, peppered with a few bigger transactions, such as China Citic Bank’s $5.7bn IPO in April and China Railway Group’s $2.5bn Hong Kong IPO in early December, accompanied by a simultaneous Shanghai ‘A’ share listing. There were 285 equity capital markets issues in total in 2007, 58% more than the 180 in 2006.

Long term bull market

"This is a sustained development phase in which the Chinese economy is migrating from private to public, creating a massive opportunity for all capital markets participants," says Kenneth Poon, head of equity capital markets for Asia at Citigroup in Hong Kong.

Poon notes that Chinese equity market capitalisation as a percentage of GDP is roughly 43%, whereas in the US the market is more than twice the size of GDP, meaning that there are still vast numbers of Chinese companies still operating without public money.

Soofian Zuberi, joint head of equity capital markets for Asia at Merrill Lynch in Hong Kong, points to what he calls a multi-year story of the development of Chinese capital markets, alongside Asian, and particularly Chinese, economic growth.

"We are," he argues, "in the midst of a long term bull market in which there have been plenty of corrections, some of them very severe such as the Sars [virus] and 9/11, and of course there will be plenty more.

"But in retrospect you can see that the market has managed these crises very well. Like Japan from the 1950s to the late 1980s and parts of western Europe in the 1950s, this is a long term bull market that is unlikely to be stopped for any reason other than some cataclysmic change."

This popular theory has catapulted Chinese equity indices and valuations skywards.

On December 5, ABN Amro reported that Hong Kong’s benchmark Hang Seng Index and the Hang Seng’s China Enterprises Index were trading at 2008 price/earnings multiples of 18.2 and 17.5 times respectively, and 2007-08 forward price/earnings to growth (PEG) multiples of 1.7 times and 0.6 times. And China’s CSI 300 Index was trading at almost 29 times forward 2008 estimates.

The Hang Seng’s China Enterprises Index rose over 61% last year, even after the post-summer sell-off.

ABN Amro argues that while both Hang Seng indices might remain range-bound for early 2008, results expected in March and April, combined with a faster-than-expected appreciation of the renminbi, should help propel stockmarket indices upwards again — albeit around perhaps a smaller group of top names than the widespread rally in 2007.

Analysts’ predictions range from moderate to very bullish for the fortunes of Asia’s markets in the months ahead. Most argue that the trend line is solid and positive. "Asia represents about 10% of global market capitalisation," says Zuberi, "but with Asia representing 30% of the world’s GDP and with that percentage rising fast, it seems clear that there is only one way that the region’s market capitalisation can go and that is to reflect the underlying GDP."

In most developed economies, total equity market value far exceeds GDP. In many Asian countries the reverse is true, making a sound rationale for investing in Asian equity markets.

Fast growth GDP floats Chinese markets

"Whereas before," says Zuberi, "it was mainly long-only funds that were invested in emerging markets and China, nowadays it seems that almost every constituent of investment money from across the globe has some part invested in Asia, and particularly China."

This liquidity pool will be fed by new issues and through the re-rating of companies as listed firms develop a public market history and, if all goes well, core earnings continue to grow.

Like many of his peers, Zuberi argues that as companies, especially from China, remain able to access new equity capital rather than rely upon borrowings, the downside appears limited. "With the equity pool available so much larger than the universe of debt funds available," he says, "the outlook looks good for companies to be able to expand rapidly while maintaining balance sheets in reasonable shape."

As most global investors are relative rather than absolute buyers, they simply cannot afford to be underweight in these rapid growth markets.

"Many investors will recall the fact that they missed out on the stellar returns of the TMT boom [at the turn of the millennium] and they won’t want to be in that position again," says Samuel Kendall, head of block origination and execution for Asia in the equity capital markets group at UBS in Hong Kong. "If investors were underweight in China and India last year they are likely to become overweight this year in order to compensate. This is a big driver for the impressive oversubscription rates on some of the deals coming out of these markets, especially China."

For most of the year, almost every deal was priced at the top end and then traded up, the most extreme case being the $1.5bn Hong Kong IPO of, the biggest online hub for Chinese companies and products, which surged 165% above its top of the range pricing.

But some Chinese IPOs late in the year suffered. Some were marked down on listing, while others subsequently priced at, or in the case of the US market, below the bottom end of their offer ranges.

The Chinese IPO bull run paused for breath in November when first dry bulk carrier Sinotrans Shipping and then Sinotruk (Hong Kong), a manufacturer of commercial vehicles, slumped 16% and 13% respectively on their debuts, in spite of having been heavily oversubscribed and priced at the top of their ranges.

Then in the first week of December, aluminium maker Xiashun Holdings became the first Chinese company IPO in Hong Kong for many years to be postponed after launch. In fact the postponement of Xiashun’s deal came after the Hong Kong stockmarket had recovered some lost ground in a period of volatility in November, during which the Hang Seng Index had dropped 17.7% to 26,004 on November 22, having hit a record closing level of 31,638 on October 30.

As investors reeled, other small Chinese IPOs only just scraped home in Hong Kong. The investor message was clear — price sensitivity had returned for the smaller deals, and the most marginal could be ignored.

China Railway seals outstanding 2007

Defying the year-end blip, in early December, China Railway Group’s $2.5bn Hong Kong IPO, part of a Shanghai bourse dual track listing that raised $5.5bn, was swamped with more than $100bn of orders. The stock soared 27% on on its Hong Kong debut, having only days earlier shot up 69% on its Shanghai debut.

China Railway’s performance came even as the ‘A’ share market had been in steep decline — the CSI 300 index had hit a record close of 5,877 on October 16 (see graph, next page), up a staggering 184% on the year, but by November 22 was off nearly 19% at 4,772.

With even very large ‘A’ share deals enjoying high demand and rapid escalation in market capitalisation, it is clear that competition to Hong Kong for new equity issues is growing rapidly.

"The authorities in China have been encouraging a lot of the larger deals, including follow-on offers, to the ‘A’ share market," says Citigroup’s Poon. "This left the average size of Chinese IPOs in Hong Kong last year very often in the $300m-$600m range, which historically is relatively small compared with the major state-owned enterprise deals in recent years."

Nevertheless, while the ‘A’ share market is capable of absorbing very large quantities of equity issuance, it has only a short history. "It is quite possible that the ‘A’ share market could in the future prove to be fickle and less predictable," says Poon, "especially given the skewed dependence on retail money and the relatively less developed institutional market in China."

Alex Woodthorpe, head of Pacific Rim equity capital markets at Merrill Lynch in Hong Kong, notes that domestic brokers in China are gaining in expertise and the domestic capital market now offers access to an immense pool of retail, and growing institutional, funds. "China can therefore fund and execute more ECM deals at home, while the Hong Kong, US and Singapore markets remain important strategic alternatives for Chinese companies’ fundraising activities."

Most big global investment banks hope they will soon be granted a domestic securities licence, so that they can compete directly in mainland China with Goldman Sachs, UBS and Morgan Stanley via its investment in China International Capital Corp.

Set against China Railway’s stellar ‘A’ and ‘H’ share performance, and strong domestic demand for Hong Kong-listed China Shipping Container Lines, which listed in Shanghai for $2.1bn in December, it is little wonder that most arrangers EuroWeek canvassed in late 2007 were unconcerned about what they saw as a blip in demand and post-listing performance of a handful of modest-sized Chinese IPOs in Hong Kong and the US.

Bull market stampede charges into 2008

Despite the strong market momentum in Chinese equity, some say this kind of euphoria is not sustainable.

Poon believes the November sell-off was a healthy correction and helped arrangers tone down issuers’ and investors’ expectations. "In the short term this might mean some disappointment for momentum investors," he says, "but in the longer term, it represents a healthy correction of the market and a buying opportunity for long term investors."

David Douglas, head of equity capital markets for Asia at Lehman Brothers, remains bullish on both China and India, despite the inflation of valuations in recent years. "IPOs significantly outperformed the indices, despite those indices registering often huge gains during the year," he says.

He expects that in 2008 institutions will again be aggressively buying IPOs and follow-on deals, from China and the rest of Asia, especially India.

The US market for Chinese IPOs also enjoyed a remarkable year, even if it did not escape 2007 unscathed. In early December, several Chinese deals on Nasdaq and the NYSE were priced below the bottom end of their ranges, while for the first half of 2007 most such deals in the US had been priced above the top end and then raced up further, often after the price range had been lifted during the marketing period.

US – ready, willing and even more able

But recent weak US demand for Chinese deals has done little to put Chinese companies off seeking access to public currency, high valuations, a liquid secondary market and regular access to fresh capital.

One attraction of the US markets is the ability of arrangers to price deals above the top end of the range.

Jason Cox, head of Asian equity capital markets at Merrill Lynch in Hong Kong, highlights the arrival of US domestic funds not traditionally associated with the emerging markets sector.

"Whether they seek access to Chinese stocks through Hong Kong or through the US, these funds have added greater depth and liquidity to the markets, and the pace of their expansion into these markets is accelerating," he says.

Although valuations are much higher than a few years ago, for most investors the perceived risks have fallen, partly because of the uninterrupted flow of favourable Chinese economic data and partly because few of the many international Chinese IPOs have flopped, while the vast majority have produced big returns.

Woodthorpe at Merrill Lynch explains that the US slice of the Chinese ECM market has become far more diversified, whereas a few years ago a US listing was considered mainly for technology companies. "The US has also offered many companies the opportunity to return to the market in size for follow-on offers, underlining the value of securing a high quality institutional register that, once fully confident in a company, will back its expansion with additional capital."

While many Chinese IPOs in the US market have achieved big oversubscriptions, at the same time the Hong Kong market has also won some deals that might normally have come to the US. IPOs like enjoyed phenomenal performance after listing.

"It seems that the Hong Kong market is nowadays highly competitive with the US for certain media and tech stocks, although the US still retains its importance for certain business models," Lehman’s Douglas says.

The US market clearly has the blue ribbon kudos. But it can be fickle, as it was in the first few months of 2007, and it is an expensive option, in terms of both costs and fees.

Kendall at UBS notes that while China wants to build out the ‘A’ share market’s presence and quality, it also understands the necessity of maintaining Hong Kong as a gateway for capital heading for China.

"Hong Kong has successfully risen to the challenge [of Chinese IPOs going to the US] and there are now plenty of deals, which in the past might have gone the US route, now favouring Hong Kong," Kendall says.

India plays second fiddle

Such was the success of the Chinese equity market last year that it overshadowed India, which itself enjoyed another impressive year. However, even though equity and equity-linked deals from India were up 56% on 2006 to $31.6bn and up more than 16 times from 2003, most arrangers’ efforts in the Asia region are focused on China first.

Why? Because issuers in India usually choose multiple arrangers and have in recent years reduced fees to levels at which the investment banks find ECM issues of marginal value, other than for league table accreditation.

"The opportunities in India are massive," says René Mijné, head of equity syndicate, Asia, at ABN Amro Rothschild in Hong Kong, "especially in the property, technology and outsourcing sectors, but my sense is that international arrangers might focus on China and other markets in the region because of higher fees."

While investors focus on the most attractive opportunities that deliver the best returns, and will therefore look at all markets, including India, the Indian regulators last year made announcements that, while understandable, have unsettled the market.

In particular, foreign investors disliked the unexpected announcement of the curtailment of investing via derivative ‘P’, or participatory, notes.

  • 28 Jan 2008

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
4 Bank of America Merrill Lynch 29,284.07 123 6.61%
5 Deutsche Bank 20,416.10 78 4.61%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 13,485.80 35 12.64%
2 Citi 11,728.10 31 10.99%
3 Bank of America Merrill Lynch 11,727.25 30 10.99%
4 HSBC 10,091.34 29 9.46%
5 Santander 9,784.51 27 9.17%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 15,985.59 61 11.10%
2 JPMorgan 14,992.78 59 10.41%
3 HSBC 11,482.63 54 7.98%
4 Barclays 8,704.42 31 6.05%
5 BNP Paribas 7,314.81 22 5.08%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
3 ING 2,549.27 20 8.36%
4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 AXIS Bank 6,343.17 130 18.89%
2 HDFC Bank 3,833.38 102 11.41%
3 Trust Investment Advisors 3,461.85 150 10.31%
4 Standard Chartered Bank 2,372.20 33 7.06%
5 ICICI Bank 1,992.51 54 5.93%