It is no secret that investors have been on the losing end for much of the year when it comes to IPOs in the city. According to Dealogic, year-to-date listings of $100m or higher posted negative first-day returns of 1.11% on average, compared to a gain of 0.02% in the same period a year ago.
Accelerated offerings have not fared much better, with deals raising $100m or more returning just 0.41% year-to-date on average on the first day, versus 3.10% in the period before.
Cofco Meat Holdings adds to that growing list. After raking in HK$2.0bn ($257.9m) from its IPO last month at the bottom of guidance, the stock tanked as much as 24% on its debut last week, and now has the second worst first-day return in Hong Kong this year. It was trading at HK$1.51 a share at noon on Tuesday, versus its HK$2.00 issue price.
Bankers have singled out Cofco Meat as the reason for the capitulation they are seeing among hedge funds, which have been hurt the most by the spate of disappointing IPOs. There are even fears this could roil the year-end pipeline, since investors have little margin for error as they close their portfolios for 2016.
Amid this debacle, Morgan Stanley is taking heat for its role in both the Cofco Meat IPO and a HK$6.25bn block trade for WH Group. The bank was joint sponsor and joint global co-ordinator with JP Morgan on Cofco Meat, but sole bookrunner on the WH sell-down.
The timing of the two trades left much to be desired. Morgan Stanley waived a lock-up for financial sponsor CDH, allowing it to offload shares in WH on October 27. But although the block priced at a deep discount of 8.0%, WH fell 8.2% in the aftermarket — just two days before Cofco Meat started trading.
It did not help that WH was a comparable for Cofco Meat, with both companies in the pork business. Morgan Stanley led the execution on both trades and should have foreseen the issues that would crop up as a result of their pricing, say rival bankers. The bank had not responded to a request for comment at press time.
The negative sentiment from these incidents has left ECM bankers looking for a scapegoat, and participants wondering whether the IPO market is broken.
But to blame a single bank or deal would be too convenient. After such a difficult year for ECM, not just in Asia but globally, predicting secondary performance has been an exercise in futility, no matter how successful the deal was in primary.
That Cofco Meat and WH have tumbled is far from encouraging, but they are not alone. Postal Savings Bank of China also fell after its stabilisation ended weeks ago, while China Resources Pharmaceutical Group is down 4% from its IPO. ZTO Express’ US listing, despite being 15x covered with some 600 lines in the book, plunged 15% on its first day.
The fact remains that markets have not been aligned this year, and there are any number of reasons why each issuer has sunk in secondary. But there have also been bright spots like PNB Housing Finance, which Morgan Stanley led. The stock ended its maiden trading day in India on Monday with a 15% premium.
Instead of assigning blame, it would be more helpful for banks to start getting issuers and vendors to price more sensibly, and to bring valuations back down to earth. ZTO may have tumbled on its debut, but it could have been worse: the issuer wanted to price at $21 a share, before the leads pushed this down to $19.5.
If there was ever a time to manage expectations, that time is now. And even though investors are losing patience, there will always be interest for the right names at the right price.
It is often easy to point out someone else’s mistakes. But at the moment, no one can point a finger without three fingers pointing back.