Market mood sours as flotations sink

The stuttering performance of new company flotations on Asia’s leading stock markets in recent weeks has raised concerns over the way the region’s stock markets operate.

Despite evidence of a continuing booming economy – compared with the spluttering twin engines of Europe and North America – initial private offerings (IPO) have failed to take off.

Since the beginning of 2009, the average Hong Kong IPO is down, in value-terms, by 13%, while seven in 10 local listings have since underperformed the Hang Seng Index.

In the first quarter of 2012, just $2 billion was raised through initial stock sales, compared with $7.2 billion a year ago.

Analysts blame bad pricing and poor valuations. Eric Wong, head of investment banking at China Construction Bank International in Hong Kong, told Emerging Markets: “A majority of fund managers and institutional investors have got their fingers burned. That’s why we haven’t seen too many IPOs recently.”

Another factor is concern over poor corporate governance that has led to a slew of pulled listings, and delistings, by US-listed mainland firms. That, along with aggressive pricing, has led Hong Kong regulators to consider criminalizing underwriters deemed to have written inaccurate IPO prospectuses.

Further north, China’s stock markets are also struggling, but in a different way. The IPO market in China is booming, with major listings planned by firms as diverse as Bank of Shanghai, Huaibei Mining, and People’s Daily Online.

Secondary trading in the mainland is in the grip of one of its prolonged slumps. The Shanghai Composite Index, a weighted basket of the biggest mainland stocks, is down nearly 20% in the year to 1 May.

Andy Rothman, chief China macro strategist at CLSA, said mainland investors were waiting for a “big policy easing” by Beijing that was “very unlikely to come”.

Others blamed Shanghai’s torpor on the aggressive approach mainland underwriters take to pricing local IPOs, which forces stocks south on the first day of listing. New rules imposed in late April by China’s securities regulator are designed to clamp down on this.

However, some bourses have bucked this trend. In Singapore, crude palm oil producer Bumitama Agri raised $177 million in an April IPO. Other flagship stocks sales are in the pipeline including Flag Telecom, a division of Anil Ambani’s Reliance Communications.

This has led some investors to identify a “North-South” divide opening up in Asia, where IPOs in northern markets such as Hong Kong and Shanghai are priced aggressively and fall on debut, while southern stock sales, such as Singapore, rise.