Rise and shine: HK ECM waking up from slumber
The Chinese and Hong Kong equity capital markets are stirring back to life after the turmoil of the summer, with a pair of IPOs enjoying strong debuts this week. No one is calling a recovery yet, but bankers are keeping their fingers crossed that the fourth quarter will offer a good window to push through deals, writes John Loh.
Stocks on both markets have been down in the dumps since the middle of the year, not only because of the summer slowdown but also several policy missteps by China after state officials struggled to prevent a crash in the domestic A-share market.
The mood lifted somewhat this week, with the Shanghai Composite notching a 2.97% gain on October 8, its first trading day after the Golden Week holidays. Indices in Hong Kong fell the same day, but had climbed earlier in the week, stoking hopes of a recovery.
The Hang Seng China Enterprises Index, which tracks H-shares in Hong Kong, has risen 11.45% since the start of October. And that momentum paved the way for the debuts of IMAX China and Regina Miracle International, which saw their shares pop 10.5% and 16.1% on October 8.
Their strong performance has given comfort to some that calm is returning to the market. But an ECM syndicate banker said he was just mildly positive on the fourth quarter, if only because Chinese money has to go somewhere.
“There’s still a lot of Mainland interest in Hong Kong, even if it is not as exuberant as before,” he said. “Those investors are cash rich, and I hear a lot of them flocked to buy shares in IMAX. But fundamentally, people continue to be concerned about the Chinese economy.”
The banker reckons it is too soon to call a recovery, even if Hong Kong shares appear to have found solid ground over the past week. The spike may only be temporary, he said, and his team was prepping for a busy, but also tougher, fourth quarter than previous years.
All eyes are now on the IPOs of China Reinsurance Corp, China Huarong Asset Management and CICC. The trio plans to raise some $5bn over the next few weeks, with ECM bankers looking at these trades to set the tone for what they hope will be a bumper fourth quarter for share sales.
“There’s a lot riding on the three of them,” said an ECM banker working on several of the IPOs. “I have other small deals coming at the end of the year, but first we need China Re, CICC and Huarong to build momentum. People are looking at them as a benchmark.”
China Re and Huarong began pre-marketing their deals to investors this week, with the former set to open books on October 12, followed by Huarong on October 15 and CICC in mid-October.
“December is usually the busiest season for IPOs in Hong Kong and we see no reason why it should be any different this year, not just for us, but many other law firms and market practitioners too,” he said. Companies typically rush to list by year-end if their accounts are filed for up to June.
Cheap valuations have also given investors a reason to wade back in. Erwin Sanft, head of China strategy for Macquarie Securities Group, said H-shares were on the path to recovery, with the index trading below 1x price-to-book and touching levels not seen in years.
“We’ve been pounding the table for two months on this and have been strong proponents for H-shares, especially with the index recently trading at a 20-year low in terms of P/E and a 15-year low for price-to-book. It’s the best time to look for deals,” he said.
Yet a head of ECM for a global bank in Hong Kong warned that pricing power remained firmly in the hands of buyers. Investors usually look for a 10%-15% discount in good times, but in today’s market they were more likely to ask for up to a 25% discount, he said.
That does not mean buyers are shunning deals. “Investors need that cushion, but they are engaged,” the head of ECM said. “I thought we were shut for the rest of the year. That’s not the case, and secondary markets could bounce back as the Hang Seng is trading at less than 10x P/E.”
Whatever the sentiment in secondary, issuers seem keen to add to the pipeline. One senior capital markets official in the city said his schedule was packed with meetings for A1 submissions through November, and the fourth quarter will be one of his busiest in years.
“Huarong is a tough sell because of where China Cinda Asset Management, its only comparable in the distressed asset management sector, is trading, and investors have been reluctant on pricing,” said an ECM syndicate banker working on the transaction.
Investors were punishing Cinda for buying Nanyang Commercial Bank at a premium to fair value, he added. But stripping out that acquisition, Cinda is actually trading at 1.3x price-to-book, which would get around the rule that bars Chinese state-owned assets from being sold at less than 1x book value.
That argument, though, is proving hard for investors to swallow, especially as many have had their fingers burnt. Most new issues this year in Hong Kong are trading below their issue prices, while fund managers have lost plenty of money in the third quarter alone.
That’s why the leads on Huarong plan to launch with a fully covered book.
“We’re working on locking in the cornerstone investors at the moment and hope to have enough visibility from both the cornerstone and anchor investors by the time we open books,” the syndicate banker said.