Strong forecasts provide foundation for 2010 boom

Asia’s equity capital markets finished 2009 with a bang, with deal volumes and valuations prompting some unwelcome comparisons to the boom days of 2007. But confidence is running high as investors flock to the fast-growing region. By Steve Garton.

  • 01 Feb 2010
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Asia’s equity capital markets have shifted quickly back into growth mode. While the more mature Western markets remain focused on recapitalisations, Hong Kong and China have risen to become the world’s busiest markets for new listings. Analysts are justifiably wondering whether the markets have come too far, too fast, but upbeat economic forecasts for 2010 mean Asia’s equity capital markets look poised to continue their boom.

Hong Kong surpassed New York for the first time in 2009 to become the world’s busiest IPO market, recording deals worth over $26bn in the year to December 14, according to Dealogic. Add to that the $3.9bn Hong Kong listing from China Minsheng Banking Corp — which Dealogic does not count as it is already listed in Shanghai — and a $3.3bn deal expected at the end of December from China Pacific Insurance Group, and the numbers are even more impressive.

Keeping up the pace

There is little sign of a slowdown in the flow of IPOs in Hong Kong, where a pipeline of big deals has already developed for 2010. More than $25bn of the 2009 total came in the final four months of the year, with little impact on the overall market, and bankers are confident that the pace of issuance can be sustained.

"With the amount of big deals that are in the pipeline, 2010 could be significantly bigger," says Ken Poon, head of equity capital markets for Asia at Citi in Hong Kong. "China still has a long way to go in terms of the proportion of its economy that is in public hands."

American International Group is pressing ahead with plans for the Hong Kong listing of its AIA unit, slated for the first half of 2010. Mandated to Deutsche Bank and Morgan Stanley, that deal alone could be worth more than $10bn, making it the biggest in Hong Kong since 2006 and giving volumes for the year a big boost.

Agricultural Bank of China and China’s State Grid Corp are also tipped to float in Hong Kong in 2010, each with multi-billion dollar deals. Hong Kong conglomerate Swire Pacific has mandated banks for a $3bn spin-off of its properties unit that is also set to come to market in the first half.

Deals mandated in 2009 may well return, including the listing for UC Rusal, the Russian aluminium group, which was only stopped from launching its IPO at the end of 2009 by a delayed approval from the exchange’s listing committee. With debts of close to $17bn to pay down, Rusal finally priced its ambitious IPO at the end of January, raising $2.2bn.

Resourcehouse, the mining group controlled by Australian billionaire Clive Palmer, came close to launching a deal worth up to $3bn in November before postponing its plans while it sold a stake in a big coal project to a Chinese partner. Lead underwriters Macquarie and UBS will be hoping the company will revisit the market in 2010, although the cash injection has reduced its need for capital. Wilmar International, a palm oil business controlled by Malaysia’s Kuok Group, postponed plans to list its China unit amid market jitters at the end of September, but Bank of China International, Goldman Sachs and Morgan Stanley still hold a mandate for the $3bn deal.

Hong Kong may well lead the way for share sales again in 2010 but many of Asia’s other markets are catching up. India’s government is preparing to sell partial stakes in a number of state-owned utilities in block deals and initial public offerings worth at least $8bn. The companies in the first wave of sell-downs include NMDC, NTPC, Rural Electrification Corp and Satluj Jal Vidyut Nigam, and bankers are expecting more stake sales to follow after the end of India’s financial year on March 31.

Korea’s new listing market also rebounded in 2009, welcoming IPOs from the likes of Tong Yang, the first life insurer to float, soju maker Jinro and SK C&C, a telecom spin-off. Korea Life, Samsung Life, Mirae Asset Life and more are expected to come to market in 2010 as the country’s insurance players look to raise capital to fund overseas expansion.

Follow-on business, while harder to predict, is also expected to make up a big part of the Asian markets in 2010. The recapitalisation move is over in Asia, at least outside of Japan, but companies that are growing fast may need to return to the equity markets to top up their capital or to fund new projects. Bankers expect real estate companies, as well as plays on the Chinese consumer market and renewable energy sector, to tap the markets this year, while the banking sector is being closely watched.

China’s banks will need to raise Rmb368bn ($54bn) to keep their capital adequacy ratios at 12% after extending a record amount of new loans in 2009 to support the economy, analysts at BNP Paribas said in November. That is a big number, but it is only a tiny percentage of their listed capital and bankers expect the total to be split between a range of public placements, rights issues and subordinated debt.

Lessons to be learned

Those that do make it to market in 2010 will be well aware that strong markets do not necessarily translate into successful deals. A number of new listings flopped — or collapsed altogether — in 2009, in some cases even after drawing well oversubscribed books.

At the time of writing, every Indian power company that floated in 2009 was trading below its offer price. Adani Power, NHPC and Indiabulls Power raised a combined $2.3bn — more than two thirds of India’s total raised to December 14 — in deals that were all more than 20 times oversubscribed. But all traded down, dampening demand for a subsequent $563m IPO from JSW Energy in December and jeopardising plans for the $2bn listing of Jindal Power.

Hong Kong has had its fair share of flops. At the time of writing in mid-December, 14 of the 52 stocks that had listed in 2009 were underwater, according to Dealogic data. A slightly different group of 14 traded down on their opening day, including a number of Chinese property developers, which were faced with the challenge of attracting investors in an already very crowded market.

Sunac China cancelled a $284m IPO in December, joining Excellence Real Estate Group, which abandoned its $1bn IPO in October and Powerlong Real Estate, which cut its target price by up to 44% to draw demand for its $600m listing. Mingfa Group, another developer, relaunched its $277m IPO in November at a lower price.

Analysts, however, have kept their faith in the sector.

"The flow hasn’t really hurt the market. Maybe certain IPOs have not done so well, or struggled to get away but it’s a crowded market. Some of the deals we think look quite cheap we expect to perform very well in the first half of 2010, especially in the property sector," says Erwin Sanft, head of Hong Kong and China research at BNP Paribas.

Poor debuts were not limited to the property sector. High-profile issuers such as Sands China, the Macau unit of gaming group Las Vegas Sands, priced its $2.5bn listing — at the time the second biggest of the year in Hong Kong — at the bottom of its target range, only for the stock to sink 10% on its debut in November. Metallurgical Corp of China, which raised $5.3bn in a dual Hong Kong and Shanghai listing in September, sank 12% on its debut in Hong Kong and was 22% down by December.

"Investors have not been disciplined enough on pricing," said one head of equity capital markets for Asia. "Surprisingly, investors have allowed issuers to price deals above where they should have priced."

Pricing was only one of the challenges faced by the arrangers of the first big new listing of the year, when China Zhongwang Holdings, an aluminium products maker, raised $1.3bn at the end of April in a deal handled by Citic Securities, JPMorgan and UBS — at the time the world’s biggest IPO of the year. Priced at HK$7, towards the low end of its HK$6.8-HK$8.8 target range, the stock lost 5% on its first day and underperformed the market all year, closing at HK$7.30 on December 14, but it set the first benchmark in the Hong Kong market, paving the way for a host of deals that followed.

Valuation worries

Zhongwang came to market in April at a modest valuation of around 11 times projected earnings for 2009. By September, however, the market was able to support much higher pricing expectations — in the right sectors.

Sinopharm, China’s second biggest drug distribution company, commanded a multiple of around 25 times 2010 earnings when it priced its $1.1bn IPO in September, and the stock has since soared over 65%. China Longyuan Power, the country’s biggest wind power generator, priced its $2.2bn listing in early December at 29 times forward earnings, on a par with listed peers in Europe but at a high price by any measure.

"Investors were attracted to big deals from best-in-class, high quality companies with good track records and fully funded business models," says Justin Haik, head of equity syndicate for Asia Pacific at Morgan Stanley in Hong Kong. "Some lower quality issuers were able to come to market at times when demand was especially high, but in general the market has been relatively efficient."

Hong Kong’s Hang Seng index stayed virtually flat in the last quarter, in marked contrast to the rapid gains of earlier in the year, and a valuation of around 19-20 times forward earnings sparked some unwelcome comparisons to the end of 2007, when the market peaked at around 25 times earnings before slumping violently.

"A lot of people try to compare December 2007 with now, but the situation is really very different," says Ng at JPMorgan. "In 2007 you had a market that was going up and up, whereas the economy, globally, was falling off a cliff. Here, we do have a market that has been very strong, but you do have an underlying economic recovery around the world."

Price to earnings multiples will go down as earning forecasts are revised upwards, and confidence in China’s continued recovery is leading to some bullish forecasts. Sanft at BNPP expects the Hang Seng index to test 30,000 again in 2010, around 30% higher than the year-end number.

"In the next five years Hong Kong will experience a huge boom, as it has been given the role of the foreign exchange centre for China," he says. Financial flows will only shift to Shanghai once the renminbi is fully convertible, Sanft adds.

The number of deals that failed to perform in 2009 is also a big difference from the 2007 peak.

"There is no real evidence of a bubble in the equity capital markets product in Asia," says Haik at Morgan Stanley. "Investors have been discerning, whereas in 2007 there was little discrimination and almost everything was going up."

Economists remain convinced that Asia’s biggest economies, India and China, will grow at close to 10% a year in 2010, and that pace of growth will continue to attract investment. Mutual funds are still reporting strong inflows, leading to a steady demand for Asian equities, while investors in the US and Europe are increasing their focus on the region.

"Some markets may not see so much activity as in 2009, but without any huge surprises you have to think China and India will pick up. The shift in asset allocation from the developed markets to Asia is far from over," says Poon at Citi.
  • 01 Feb 2010

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