The Hong Kong IPO market has had a dismal start to the year. Only 20 companies have completed listings, raising $1.24bn. Just one — HKBN — surpassed the $100m mark. This is in stark contrast to last year, when companies raised around $4.7bn via IPOs during the same period, according to Dealogic.
There are plenty of reasons being thrown about for the paltry business so far: the blackout period ahead of company results announcements, a mid-February Chinese New Year break and volatile global markets have all been identified as at fault.
Inevitably, some have even gone so far as to blame the upcoming Hong Kong Sevens rugby tournament scheduled, which runs March 27-March 29, for the quiet month end. The fact that it coincides with the Credit Suisse Asian Investment Conference (March 23-March 27) means investors and issuers from the continent are set to flock to Hong Kong. There are worse excuses for poor deal flow.
This backdrop meant all eyes were on HKBN’s trading debut on March 12, after the company raised HK$5.80bn ($748m) from investors, pricing its shares at HK$9.00. Its performance was expected to provide potential issuers with the impetus to launch their own IPOs, especially as HKBN took the gong of the largest listing of the year in the city.
Unfortunately for the market, HKBN’s first day as a listed entity failed to impress. It fell to an intraday low of HK$8.82 soon after opening, before stabilising during the rest of the session. The highest price it managed to get to was HK$9.11 before closing flat at HK$9.00.
HKBN’s performance certainly doesn’t inspire, especially as the Hang Seng Index advanced by 0.30% the same day. But market watchers reckon things would have been grimmer for the company if it wasn’t for some help from stabilisation agent Goldman Sachs. It took careful monitoring on day one to ensure the stock didn’t slide more severely.
With the rest of the year expected to be a tough one for Asia’s equity capital markets, what is becoming clear is that bookrunners and sponsors need to do more to differentiate themselves from the rest of the crowd. In HKBN’s case, Goldman — with some help from joint sponsors JP Morgan and UBS — helped keep share price under control. And this is something others need to pay heed to.
Validation key
At a time when any little piece of news is able to rattle markets, banks need to ensure that once they price a deal, it performs well in the aftermarket. Global volatility has created a situation where if a deal does well in secondary, plenty of kudos will go to those bookrunners who work hard to ensure success. The opposite outcome will lead to swift condemnation.
Chasing deals for league table credit is a fair move, but in a competitive year where deal flow could be thin and markets unconducive, banks will be under more pressure than ever to validate their mandates.
Of course, not everything rests solely on the banks. Issuers should also think carefully when appointing leads for IPOs, including the role of stabilisation agent. If multiple banks are taking charge, careful allocation of the "workstreams", in the industry jargon, will be crucial. It was an important reason for the smooth execution of Alibaba's jumbo listing in 2014, for example.
Asian markets are expected to experience a strong rebound, at least in the short term. Bankers need to use any opportunity given to them as a way to make their case, either by setting reasonable valuations for transactions or by working around-the-clock to provide good aftermarket performance. When the first shot at business is tough enough, securing a repeat mandate is gold dust.
Banks will do well to remember that when the going gets tough, the tough get going. The year is going to be a tough one in ECM — if banks want to stand out, they would do well to keep the old adage in mind.