The rush of companies launching deals in Hong Kong over the past few weeks has brought the local ECM market back to life, but most issuers have adjusted their price expectations to make sure they can find demand. That is the right move, and they should continue to do so, despite the rise in Hong Kong’s Hang Seng Index over the last few weeks.
Companies have raised around $1.4bn from Hong Kong listings since the beginning of November, and a whopping $8bn more is expected before the end of the year. Bankers have done an admirable job helping issuers navigate the choppy market backdrop, and wisely told company funding officials that they need to pay up if they want to ensure demand.
But they need to keep making that argument: there is a risk that companies look at the relative ease of raising equity at the moment and go back to their old habits. Now is not the time to get aggressive.
The Hang Seng index is up 6.6% since last Wednesday, when a co-ordinated move by central bankers to ease liquidity for struggling banks and a reserve ratio cut in China gave a big boost to sentiment. But bankers are still wary of negative headlines from Europe, and no-one can predict when investors will focus on bad news over good. Companies should not assume the market will keep stay strong until the end of the year.
Leading by example
One model for wannabe issuers is Chow Tai Fook Jewellery Group. The Hong Kong-based company had originally hoped to price its IPO at between 30 times 2013 earnings, but was willing to cut that to a range of 14.8-20.8 after taking advice from bankers. That ensured strong demand for the $2.83bn IPO: the books for the deal — which is not yet closed — were covered within two days.
New China Life has also made concessions to the market environment, offering a healthy discount to its peers. The mainland financial institution opened books last week and has already got its deal covered. Hosa International, the sportswear brand, is another example. It is now marketing a deal at HK$1.60 per share, a big drop from the HK$2.88-HK$4.10 range it was eyeing in June.
But will other issuers take their cue from these – of from the likes of Haitong Securities, which released valuations last week that some bankers saw as aggressive. The securities firm got lucky, though, launching its deal the day after China it had cut its reserve ratios for banks and global central banks agreed to discount their swap lines. The response was a rush of orders on the first day of bookbuilding. Others ought to remember the context before expecting the same take-up if they push valuations to the maximum.
It is clear that companies can raise money in Hong Kong’s equity market at the moment, and no-one should criticise them for trying to make sure they close their deals before the end of the year. The long Christmas lay-off could bring a wealth of bad news, and it makes little sense to wait until next year to market a listing.
But at the same time, listing candidates would do well to remember that most of the companies that appear to be doing well in bookbuilding are doing so because they have taken a wise approach to marketing: listen to your bankers, do not push too hard — and be ready to adjust your price if investors demand it.