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Hong Kong/Singapore IPOs: Different Strokes

AM review 2014
By Mark Baker
15 Dec 2014

The equity markets of Hong Kong and Singapore have both had to contend with challenges this year. While Hong Kong had to face up to the loss of a few big transactions, and failures of others, Singapore has had to face liquidity that continues to pale in comparison to even some southeast Asian neighbours. Mark Baker reports.

Market participants love a good rivalry. And in theory, the markets of Hong Kong and Singapore are one such tussle. Bankers sometimes talk of a see-saw relationship between the two — a good year for southeast Asia and dividend plays, for instance, will see Singapore on the up. By contrast, a period of dominance for North Asia (for which read China) will naturally play in Hong Kong's favour.

It's an easy characterisation, but the dynamic between the two is now increasingly nuanced rather than binary.

From a pure volume standpoint, there is little contest. IPO volumes in Hong Kong totalled $20bn-equivalent in 2014 to early December, compared to $2.4bn in Singapore. And the previous years saw Hong Kong clock up double the volume of Singapore in 2012 and almost three times in 2013 (see graphs).

But for all those differences, both markets have been engaged in a similar existential debate at times in the last 12 months. For very different reasons, both are being forced to consider their relevance.HK IPOs

Hong Kong's first part of the year looked like a series of missed opportunities — or simple calamities. First there was the growing realisation that the Hong Kong Stock Exchange's decision to stick to its one share, one vote principle was going to result in the $25bn IPO of Alibaba — the largest ever listing in the world — taking place in the US rather than Hong Kong (see box below).

Then came more apparent ammunition for those arguing that an obsession for cornerstone investors and huge bookrunner syndicates, particularly on the part of Chinese issuers, was in danger of seriously damaging the Hong Kong IPO process. The initial failure in April of WH Group's IPO, with 17 bookrunners and a syndicate numbering 29, and its subsequent revival and successful completion in July, driven by just two banks, were held up as clear examples of the wrong and right way to get deals done.

Another deal, the IPO for AS Watson, fell victim not to regulatory issues or incompetence, but to a private investment by Temasek. Parent Hutchison says that a flotation remains the plan, but it had been expected to be one of the biggest deals in Hong Kong in 2014 and its loss was another early blow.

All this was against the backdrop of a new sponsor regime that took effect in Hong Kong in late March. Now banks — and individual bankers — would be held more accountable than ever for the accuracy of the information disclosed by a listing candidate. Prospectuses were to be scrutinised with much more care.

Regulation and the quality of listed companies was on the minds of both exchanges, with Singapore also taking steps to tighten up qualifications such as minimum share prices.

And the debate in both markets over the best way to approach cornerstone investors continued, in part wrapped up with the criticism of giant syndicates but also more on a more fundamental level, considering the original purpose of bringing in early investors in big size and how that had been corrupted by practices when markets were tough.

Cornerstone controversy

Despite the misses, Hong Kong's record has not been bad in 2014. "The market has done well this year in terms of volumes," says Philippe Espinasse, a former ECM banker and now an author of books on IPOs. "This is less to do with the exchange than the fact that there has been more confidence in primary equity and a better sentiment generally towards Europe and the US."

These conditions have combined with the fact that companies, at some point, do typically need to raise equity. In 2014, necessity has met opportunity.

Quality of business, however, has remained an issue, hence the Hong Kong exchange's focus on the sponsor regime. But if IPO sponsors are having to accept more responsibility, when it comes to bookrunners there appears to be more proliferation than ever before.

Some say this smacks of weakness at the issuer level. "Having 20 banks on a deal is a sign that an issuer is in job preservation mode," says one ECM head based in Hong Kong. "If it fails and he used two, it's his fault. If it fails and he used 20, it's the Street's fault."

One excuse for a stuffed syndicate has frequently been the desire either of issuers or banks to source as many cornerstone investors as possible to give a deal momentum ahead of launch. But even this has proved controversial.

"One problem is that the quality of the cornerstones has not always been that great," says one market participant, adding that a book that launches stuffed full of Chinese corporate names is hardly the best preparation for a deal. "Is this about insecurity or insurance? At the end of the day managing the cornerstone book should be like managing any other book. If the process is handled properly then it should not damage a deal."

Others agree with that analysis. "Cornerstones should absolutely not be used as a down market strategy," says another head of Asia ECM. "But in 2012 and 2013, people were saying that you had to be 50% covered at launch."

Some attribute the difficulty in getting more conventional institutional accounts into Hong Kong deals as cornerstones to the lock-up requirements of that market, unlike in Singapore, for example, which does without lock-ups entirely.

"Hong Kong should be looking carefully at this, because lock-ups impede the quality of cornerstones," says a banker. "People don't want to be stuck with a position they cannot exit."

But others disagree that there is much to be concerned about when corporates rather than institutions come into a deal.

"The market has got a long way from what cornerstone investors were meant to be about," argues Sam Kendall, global head of ECM at UBS. "There can be a perfectly good strategic reason why a corporate might hold stock in another company. Some banks now have got too fixated on what they think a shareholder register ought to look like. But it's our job to facilitate liquidity for the issuer or seller, in whatever form that might be. After all, they get to choose their shareholders."

Poor cousin

The lack of cornerstone lock-ups in Singapore is just one element that ought to make the market an attractive destination. The regime for trusts is much more developed and sophisticated than elsewhere in Asia, and Singapore has historically been a more liberal market, less given to restrictions than Hong Kong.

And it's modern. "Singapore's trading systems are much more advanced than Hong Kong's, which are more dated in comparison in spite of recent glitches," says Espinasse. "But volumes are low in spite of the technology. There is no silver bullet."

Securities turnover on the SGX, by number of shares traded, was down 19% in November from the same month in 2013, although volumes were 20% higher by value. Even so, the $1bn average daily trading volume in the month is tiny compared to the same period in Hong Kong, at $10bn, and even Thailand, at $1.6bn.

That poor liquidity is one reason why the exchange remains pitifully incapable of attracting much IPO traffic, particularly away from trusts. And in a year where the global interest rate environment has decidedly not played to Singapore's yield play strengths, it's getting worse. Total IPO volumes in Singapore so far this year stand at less than half the same period last year.

Competition is now strong from the kinds of market that might once have been expected to provide listing candidates.Sing IPOs

"Singapore's problem is relevance," says one head of Asian ECM at a bulge-bracket firm. "It has always had a dream of becoming an ASEAN market, but others are developing more quickly. Thailand trades more in an average day than Malaysia, Singapore or the Philippines."

Others point to a simpler reason: "It's just a smaller market, with smaller companies," says another ECM head.

If there is no pressing reason for companies to leave their own market, all Singapore's fancy market infrastructure counts for little. And without a captive market to provide a steady stream of issuers, like China does for Hong Kong, it is hard to see this changing.

A glance at the numbers shows a stark contrast. While 77% of this year's Hong Kong IPO volumes have come from non-Hong Kong issuers, less than half of Singapore's volume has come from issuers based outside the city state. In 2013 the difference was even more dramatic, with 89% of Hong Kong volume from foreign issuers and only 8% in Singapore (see graphs).

"Singapore's opportunities lie with its neighbouring countries, but nothing is developing quickly in the cross-border space," says another ECM banker. "There were plans to list San Miguel's energy unit in Singapore but in the end that didn't happen. Vietnam Airlines, for instance, which is a regionally known name, listed in Vietnam."

Even the bright spot that had been expected to come before the year wrapped now looks pushed back to 2015. At the time of writing, Universal Terminal, an oil storage company that is listing as a business trust, had just delayed its S$1bn ($756m) IPO to next year.

BOX: Dual Class Warfare

Many times over the past year it has looked like the debate over whether dual class share structures should be allowed by the Hong Kong Stock Exchange would overshadow almost every other market consideration.

Through months of public wrangling, the exchange stood its ground against online marketplace Alibaba and refused to change its principles merely to suit what was set to be the biggest listing of all time, opting to stick to its long held belief that to allow classes of shares with different voting rights — which is what Alibaba's management wanted and which is fairly common in tech companies — could put other investors at risk.

Those principles cost Hong Kong the world's largest IPO, which ended up at $25bn when it priced in September. Alibaba's management is thought to have wanted at least a dual listing in Hong Kong, if not a sole listing there. The US, where Alibaba eventually listed, not only allows such structures but also access to greater liquidity and a better range of comparables.

That said, there was never going to be any shortage of liquidity made available for Alibaba had it been listing in Hong Kong, either without its preferred dual class structure or after a change of rules by Hong Kong.

"It's unfortunate that Alibaba was not a Hong Kong listing," says one head of Asia Pacific ECM. "But the available liquidity would not have been exchange-specific — people are as likely to trim their Apple positions as they are Tencent." Tencent, a provider of mobile and internet value-added services such as messaging, is listed in Hong Kong, one of the rare China tech stories to do so.

For Alibaba, the prestige of being the supreme stock in what is practically its home market would have held powerful appeal. Some bankers, however, argue that that would not have been a sufficient reason, and that even though a different outcome might have changed the dynamics of where Chinese tech companies list, the final decision to press ahead in the US was understandable.

"If Alibaba had listed in Hong Kong it could have reversed the trend of tech companies going the US," says Sam Kendall, global head of ECM at UBS. "But why stay? There's Tencent and no one else."

There would have undoubtedly been huge appeal for the Hong Kong exchange, however, particularly given the recent relative lack of jumbo issuance. Snapping up the biggest deal ever would have been quite a coup, hence the surprise among market participants at its intransigence.

But although it was not willing to be seen to buckle in a very public tussle with Alibaba, once the spotlight was away from Hong Kong and onto the US listing itself, the exchange showed its true feelings by belatedly launching a debate on whether to allow such structures.

A concept paper, which was launched at the end of August, asked for feedback by the end of November, although it is not known when responses will be published. Charles Li, CEO of the Hong Kong exchange, has cautioned in his online blog that the debate is at the moment just that — a debate, not a traditional consultation where the market is asked for feedback on a rule proposal. Nonetheless, he has also said that if a final decision is taken not to allow dual class structures, it should be the result of that vigorous debate rather than inertia.

"Inaction appears to have helped nobody in Hong Kong, but it does hurt Hong Kong’s competitiveness in attracting new economy companies," Li commented in April. "We should ask then: between blindly following and completely rejecting the US model, is there a middle road onto which we could walk where we could consider allowing some weighted share rights to founding shareholders of technology companies while at the same time ensuring that we adequately protect the core interests of the public investors?"

The way in which that debate is being conducted is not to everyone's taste, however. "This discussion looks very self serving to me — the exchange is the primary regulator of listed companies, judge and jury," says one market participant. "There should be an impartial debate by a regulator that does not have a hand in the pie."

Others argue that the issue should never have attracted the time and scrutiny that it already has, given the small number of companies for whom the structure is even relevant — and that the debate over whether dual class structures should be allowed in Hong Kong should not be a debate.

"People forget about these structures pretty quickly," says one head of ECM. " You already have non-voting shares in Thailand and India. Investors should just be able to choose whether or not they accept it in a particular company's case by choosing whether or not to invest."

With the HKEx's Li describing the concept paper as an early part of the discussion, Singapore looks set to get in ahead of Hong Kong on the matter of dual class structures, having announced in October an amendment to its Companies Act to allow variable voting rights for public companies.

At the moment this only applies to non-listed public companies (the government put the number of those at about 800), but it would be extended to listed companies upon approval by the Monetary Authority of Singapore and the Singapore Exchange.

It remains to be seen whether this can really help Singapore wrest any business from Hong Kong or the US. Bankers say that if it does so it is likely to be at the margin, in southeast Asia only. 

By Mark Baker
15 Dec 2014