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China's IPO Machine Continues to Pump Out Deals
Smaller Chinese companies keep the IPOs coming despite market setbacks and valuation concerns.
After dominating the global IPO market for the past three years, Chinese companies took a pause at the start of this year. Stock prices were sliding in Shanghai and Hong Kong amid fears of Chinese monetary tightening and a slowdown in global growth, while many investors complained about the heavy supply and high prices of recent initial public offerings. Reflecting the cautious mood, in late January, China Hongqiao Group, the countrys largest private aluminum maker, withdrew at the last minute a planned IPO on the Hong Kong stock exchange that had been expected to raise as much as $2.2 billion.
The lull didnt last for long. Last month China Hongqiao lowered its sights and got its deal done. The company cut the size of its offering in half and priced the shares at HK$7.20 apiece, the low end of the indicated range, raising HK$6.4 billion ($822 million). The shares rose a modest 2.2 percent on the first day of trading. Some other companies have been far more successful. Just a few days after China Hongqiaos share debut, Qihoo 360 Technology, maker of a popular Internet browser and online security products, raised $175 million with an IPO on the New York Stock Exchange and saw its share price surge 105 percent on their first day of trading, to $29.74.
China Hongqiao and Qihoo 360 can expect plenty of imitators before long. Although political unrest in the Middle East and Japans devastating earthquake, tsunami and nuclear disaster have shaken global markets in the past two months, Chinas IPO machine continues to pump out deals at a rapid pace. Investor demand for exposure to Chinas booming economy remains strong, and the countrys corporate sector is only too happy to satisfy that appetite. Chinese companies raised a total of $16.5 billion with 98 IPOs in the first three months of this year, not far off the $18.3 billion raised in 104 IPOs in the same period in 2010. Bankers and analysts say the pipeline of businesses looking to conduct IPOs is larger than ever, and predict there could be as many as 700 offerings in 2011 if conditions remain favorable.
We see more IPOs this year in terms of number of issues and volume, says Patrick Tsang, Shanghai-based co-head of public offerings at audit firm Deloitte Touche Tohmatsu CPA, a leader in helping Chinese firms prepare for public share sales. Last year China produced 472 IPOs worth a total of $105 billion, representing 37.5 percent of the global total.
Small and midsize companies are increasingly leading the wave of companies coming to market. The trend is a notable change from recent years when big state-owned enterprises, especially in the financial sector, made headlines with jumbo offerings. We expect many small and medium-size offerings, says Kester Ng, Hong Kongbased Asia-Pacific head of equity capital markets at J.P. Morgan. There will be plenty of $200 million to $1 billion deals, but youre not going to see a $22 billion deal like the Agricultural Bank of China [ABC]. The banks dual IPO on the Shanghai and Hong Kong stock exchanges last summer was the worlds largest ever.
Internet and technology stocks are generating some of the greatest buzz, as well as the occasional controversy over pricing. ChinaCache International Holdings, a Beijing-based provider of caching services that speed Internet transmissions, a Chinese equivalent of Akamai Technologies, raised $84 million with an IPO on the Nasdaq Stock Market last fall. On October 1 the companys shares soared 95 percent above the offering price to close the first day of trading at $27.15. The premium represented the highest trading debut for a U.S. IPO since October 2008. The mark didnt stand for long, though. On December 8, Youku.com, an Internet video company comparable to YouTube that raised $203 million with an IPO on the New York Stock Exchange, saw its shares surge 161 percent above their offering price on their first day of trading, to close at $33.44.
The strength of our share price on the first day of trading indicates that there is a huge appetite for Chinese IPOs globally, ChinaCache CEO Wang Song told Institutional Investor in an interview in his office on the outskirts of Beijing. Among our clients, we have at least 15 to 20 companies that are preparing for IPOs in 2011. Its not hard to see why. ChinaCaches flotation made Wang and Jean Kou Xiaohong, his wife and co-founder, instant millionaires: The 20 percent stake they own was worth $126 million after the first day of trading.
For some investors, the rush for Chinese technology stocks is all too reminiscent of the late-90s U.S. tech craze. Although Chinese stocks led by Youku.com and ChinaCache accounted for four of the top five IPO debuts on U.S. stock exchanges last year, China also produced the five worst debuts, led by Sky-mobi. The provider of mobile-phone applications saw its shares drop 25 percent below their $8.00 IPO price on their first day of Nasdaq trading. (The stock has since rallied strongly to trade late last month at $12.69.) In the first three months of this year, six of the ten largest Chinese IPOs closed the first day of trading below their offering price, according to data provider Dealogic.
Michael Chiu, Hong Kongbased manager of the $395 million ING (L) Invest Greater China Fund at ING Investment Management Asia-Pacific, says the fund avoided Chinese IPOs late last year because of concerns about valuations, but believes the decline in Chinese stock prices early this year has made recent pricings more reasonable. Chinas CSI 300 index was trading at 3,256.08 late last month, down 8.5 percent from its recent top in November after touching a low of 2,919.16 in January. Australias AMP Capital Investors, which manages A$98 billion ($101 billion), has also shunned recent IPOs because of pricing concerns but considers the broader Chinese market well supported. Valuations on Chinese shares are now quite reasonable, says Shane Oliver, the firms chief economist and strategist. The forward price-to-earnings ratio of around 13 times is quite low for a country with 20 percent earnings growth, and the historic P/E is well below its average of the last decade.
Although the recent cooling off of the market has deterred some issuers, the return of more-modest valuations could be laying the foundations for a sustained flow of equity offerings, bankers and analysts say. With markets volatile and valuations depressed versus recent highs, some companies are choosing to hold off on launching, says Rupert Mitchell, managing director and head of equity syndicate for Citi Asia-Pacific in Hong Kong. Investor risk appetite has been reined in, but there is always a home for a good story. Medium term we remain optimistic that deal flow will pick back up. We have a strong backlog of high-quality transactions to execute.
Despite volatile markets in the aftermath of the Japanese earthquake and tsunami, Citi went ahead last month with a Hong Kong IPO for Sichuan-based China Kingstone Mining Holdings, Chinas leading producer of beige marble for high-end office towers, hotels and luxury residential complexes. Chairwoman and CEO Chen Tao said the company had been preparing its offering for months and didnt want to delay. The offering raised HK$1.3 billion, which Kingstone will use to expand production and acquire mines.
Most of the Chinese IPO flow this year will come from private companies like Kingstone rather than state-owned enterprises. The government and its advisers are working with the private sector to come up with a draft list of 1,500 to 2,000 names of potential listing candidates over the next two years, according to one senior government adviser who spoke on condition of anonymity. Bankers and analysts expect several companies to launch IPOs of $1 billion or more in coming months, including Taikang Life Insurance Co., a midsize insurance company; Huaneng Renewables Corp., an alternative energy producer; New Century Shipbuilding Co. and Shanghai Pharmaceuticals Corp.
Some of the greatest IPO activity last year came from the retail, technology, manufacturing, natural resources and energy sectors, says George Taylor, Hong Kongbased co-head of equity capital markets at Morgan Stanley. This year there seems to be a similar pipeline of companies, he says. Consumer retail continues to grow. The other sectors we think will be active will be clean energy, wind power, assemblers and producers, and financial services such as insurance.
The financial sector will produce some large offerings, albeit nothing on the scale of Agricultural Bank, bankers and analysts say. China Everbright Bank Co. plans to sell as many as 12 billion H shares in Hong Kong later this year; the deal could raise up to $7 billion to shore up its capital base. Sources say Everbright has hired China Everbright Securities (HK), China International Capital Corp., J.P. Morgan and Morgan Stanley to handle the offering. This follows the Beijing-based midsize banks $3.2 billion A-share offering in Shanghai in August, the worlds tenth-largest IPO last year. New China Life Insurance Co., a major insurer, and Guangdong Development Bank will each raise in excess of $2 billion with share offerings in the coming months. Though none of the listings to come will be the size of ABC, you will see three or four IPOs of mid- to large-scale range, anywhere from $2 billion to $5 billion each, Taylor says.
Chinas next megalisting likely will come from state-owned Citic Group, one of Chinas leading financial conglomerates whose holdings include Hong Konglisted China Citic Bank and Shanghai-listed Citic Securities, the countrys biggest publicly traded brokerage firm in terms of market share. Market sources say the company aims to raise some $12 billion with a Hong Kong IPO some time in 2012. Future megalistings will come only when the State-owned Assets Supervision and Administration Commission of the State Council is ready to allow more of its portfolio of nearly 100 state-owned companies to sell shares in public markets, sources say. SASAC is still in the process of merging state-owned companies, says the senior government adviser.
The strong flow of IPOs has been a boon for banks, both Chinese and international. Last year CICC led all underwriters in the domestic A-share market, arranging four offerings worth a total of $7.1 billion, followed by Citic Securities, Bank of China, China Galaxy Securities Co. and Guotai Junan Securities Co. CICC declined to comment on its pipeline for 2011, but Raymond Lee, Hong Kongbased head of corporate finance at Citic Securities International, says the firm has a several clients preparing to sell equity. There are a number of IPOs related to the financial sector, he says. We have IPOs coming from metals and mining and energy. We have a whole string of IPOs that will run in the range of $500 million or less.
In Hong Kong, Morgan Stanley topped the league table for underwriters of Chinese H-share issues, handling 12 issues worth $4.7 billion last year. J.P. Morgan, Deutsche Bank, Goldman Sachs Group and Macquarie Group rounded out the top five.
Hong Kong attracted 63 Chinese IPOs worth a total of $28 billion last year, ranking it just behind Shenzhens $29.8 billion in initial equity offerings and ahead of Shanghais $26.8 billion, according to Dealogic. Mainland companies now account for almost 20 percent of Hong Kongs 1,400 listed companies. The citys robust IPO market is attracting the attention of companies elsewhere, something that Hong Kong officials and executives at Hong Kong Exchanges and Clearing, which runs the local stock market, are only too happy to encourage.
Glencore International, the giant Switzerland-based commodities trading firm, is expected to float its IPO, estimated at up to $8 billion, in Hong Kong this year and has hired Deutsche Bank as lead underwriter, market sources say. Other foreign companies considering Hong Kong share offerings include the Italian luxury-goods maker Prada, the U.S. luggage maker Samsonite Corp. and South African mining company Lontoh Coal.
This trend will continue, with non-Chinese companies coming to IPO in Asia, especially Hong Kong, says Tsang of Deloitte Touche Tohmatsu. Many of these global companies are consumer brands that want to develop in China or already are developing. Investor appetite would be strong as their brands are already well recognized. Paul Schulte, Hong Kongbased global head of financial strategy and Asia banks research for CCB International Securities, the Hong Kong securities subsidiary of China Construction Bank Corp., also sees strong interest from outside the region. We have a good pipeline, from all sectors and many countries, including companies from Japan and Russia, he says.
Hong Kong Exchanges will face increasing competition for listings from overseas if the Shanghai Stock Exchange wins approval to launch an international board late this year or early next, a significant step in the governments effort to develop Shanghai into a global financial center. The board will aim to attract listings from foreign companies with existing investments in China, says Hu Ruyin, head of research at the exchange.
For now, however, China and its fast-growing economy are the overwhelming driver behind the spate of IPO offerings. Rising affluence and a growing middle class are fueling the expansion of the countrys capital markets. Most economists expect the countrys expansion to remain on track, notwithstanding the risk of monetary tightening to keep control of inflation. The International Monetary Fund projects that the growth rate will ease modestly to 9.6 percent this year from 10.5 percent in 2010.
At the annual meeting of the National Peoples Congress, or parliament, in Beijing last month, Premier Wen Jiabao formally unveiled the governments 12th Five-Year plan, which aims to shift the economy away from Chinas investment-driven export model and focus on generating more domestic demand. The plan targets seven strategic industries energy-efficient technology, next-generation information technology, biotechnology, alternative energy, hybrid vehicles, high-end equipment manufacturing, new materials for development. It also calls for increased spending on health and social security. In addition, policymakers recently announced that the government would hike the minimum wage by an average of 18.3 percent in major cities in an effort to boost consumption, especially among low-income workers.
The combination of government policy and the rise of Chinas middle class is fueling the growth of consumer-oriented technology companies, and prompting scores of them to tap the equity market. Consider the mobile-telephony market. China has 840 million mobile telephone subscribers, including 12 million who pay for third-generation data services, and users are increasingly demanding faster downloads and value-added services. We are looking at fairly explosive growth, says Carl Yeung, chief financial officer of Hangzhou-based Sky-mobi. The growth is allowing for innovation to be a key driver. There is huge demand for 3G, smartphones and mobile services.
Yeung, 31, is a former banker at Merrill Lynch and consultant for Sequoia Capital who joined Sky-mobi to help ready it for the IPO. China has a generation of young entrepreneurs who are using technology in smart ways, he says. There are many Chinese companies taking advantage of technology disrupters and doing very well. These companies will all be prime IPO candidates in the years to come.
Chinese technology companies most of them privately held and started by young entrepreneurs tend to favor listings in the U.S. because they offer richer valuations, bankers and analyst say. In addition, many Chinese tech companies have backing from international private equity firms, and a foreign listing offers the quickest avenue for these investors to exit from their holdings. Asia represents more than 50 percent of the American depositary receipt market, and China is a significant portion of that, says Gregory Roath, Hong Kongbased head of ADR business in Asia at BNY Mellon. Issues of ADRs by Chinese companies made up about 26 percent of U.S. IPOs in the fourth quarter of last year, according to Dealogic.
Obtaining an overseas listing is a major step for Chinese companies. Dealing successfully with foreign investors poses an even bigger challenge. After all, many executives gained their experience in a system where listed companies need to pay attention to only one constituent: the government. From an investors point of view, an IPO is the beginning of the process, says Richard Constant, London-based CEO of strategic communications firm Kreab Gavin Anderson. Some management doesnt pay enough attention after the IPO process. Many Chinese companies have to better manage their investor relations needs.
Last year Constants firm invited 200 Chinese CEOs to London for an IR conference. Many of them gasped when they were told that executives of London-listed companies spent 25 to 30 days a year on investor relations, Constant says. Most thought just one day a year would be enough, he adds.
ChinaCaches Wang acknowledges his company has a steep learning curve but says he is committed to engaging actively with shareholders. We realize after the IPO that investor relations and corporate governance is extremely important, Wang says. We must do both well for the sake of keeping our share price high.