China Galaxy Securities this week executed 2015’s third largest follow-on offering in Asia ex-Japan, raising an impressive $3.1bn from a private placement of shares.
Activity on the Hong Kong exchange in April has been exuberant. Some 64 deals have been priced so far to raise $8.26bn, according to Dealogic — the most transactions in a single month this year. April 2014 generated just $3.17bn of proceeds from 41 transactions.
Booming volumes have led bankers to take a bullish stance on the prospects of the city’s stock market over the longer term.
“The trend now is all about getting used to this new normal,” said a Hong Kong-based head of equity syndicate at a bulge-bracket bank. “The normal now is basically elevated interest in China equities and a massive volume of capital coming into Hong Kong, which is not going to stop anytime soon.”
Many factors have come together to enable this frenzy of activity in April. The China Securities Regulatory Commission’s (CSRC) move to allow domestic funds, including mutual funds, to invest in Hong Kong stocks was one big catalyst for the huge market turnover.
Adding to the impetus was also the discrepancy between where onshore and H-share stocks were trading — driving more mainland investors to the south to get their hands on cheaper shares. As a result, volumes in the Hong Kong market have risen considerably, reaching a record daily turnover of $37bn recently.
The rally has lasted nearly a month and has translated into plenty of primary market ECM activity in the city. Bankers are viewing investor sentiment in two ways.
“On one side there are institutional investors who are looking at ways to take profits in the current environment,” said an associate director of ECM at a Chinese brokerage. “On the other side we have retail investors who are very bullish on the whole market and are seeing no downside coming. Their views are not based on fundamentals, but the way the market is going, I think they have got it right.”
Investor favourites
While stock in most sectors is proving interesting to the buyside, they still have their favourites, reckon bankers. The success of GF Securities’ recent $3.6bn IPO and China Galaxy’s placement has highlighted the appeal of the brokerage and financial industry — interest that is likely to endure.
“Investors have been globally underweight on the broader financial and brokerage space for three or four years now,” said the head of equity syndicate. “The industry is now snapping back with a vengeance.”
That aside, the pharmaceutical sector is also a big hit with institutions and retail. Shanghai Haohai Biological Technology’s recent IPO was a case in point, with the institutional portion multiple times covered and the retail an astounding 179 times.
Other issuers are also looking to get into the action, with names such as Shandong Weigao Orthopaedic Device Co, PuraPharm Corp, Universal Medical Services & Health Management Co and Zhongzhi Pharmaceutical Holdings filing their preliminary prospectuses with the Hong Kong exchange for IPOs this year.
“You can’t go wrong with the healthcare sector,” said a second Asia head of ECM syndicate. “It’s spectacularly hot and thematically it’s very interesting for any emerging market. Among subjects being discussed on WeChat, I’d say pharma is right up there with financials and brokers.”
Loosening rules
The positive sentiment around the overall market is set to continue, said bankers. Although the valuation gap between A-shares and H-shares has narrowed considerably in the past few weeks, shares in Hong Kong are still a bargain. Southbound movement over the Shanghai-Hong Kong Stock Connect has increased and the general expectation is that more domestic investors will start to invest in shares.
According to a head of China and Hong Kong at an asset manager, the market is hoping for a further loosening of capital controls onshore over the next few months, which will give more investors the opportunity to trade Hong Kong stocks.
“The tail risks are slowly coming down and investment opportunities are rife,” he said. “If some of the more stringent controls are lifted by China, there will be freedom for so many more buyers to just go out. Sure, there is a bit of worry that the run-up has been too fast and some investors are more cautious than others, but they are happy to look at anything that comes up.”
The Hong Kong Hang Seng Index closed at 28,400 on April 29. Investor expectation is for the index to hit 30,000 sometime soon, added the associate director of ECM.