Issuers charge ahead with HK IPOs amid turbulence

Indices in Hong Kong, Shanghai and Shenzhen started the week with a big dip on June 15, as the market tried to make sense of a slew of announcements from the mainland on June 12, which included the tightening of rules on margin financing. There were also worries stemming from the raft of listings expected to hit onshore investors this month.

The markets slid again the following day, marking the first time in weeks that the Chinese indices had witnessed two straight days of losses. The Hang Seng managed to shrug off some of the negativity in the middle of the week, but its volatile performance on Thursday reflected the prevailing mood — one of caution and fear about the numerous IPOs in the market.

“People are disappointed about recent [Hong Kong] IPOs,” said a head of equity syndicate based in the city. “What we are seeing are IPOs with high-quality cornerstones, and a multiple times oversubscribed book. But when they start trading, they're like a wet fish.”

ECM bankers pointed to two high-profile companies that recently made their debuts on the Hong Kong Stock Exchange — brokerage house HTSC and biopharmaceutical company 3SBio.

HTSC priced its HK$34.72bn ($4.48bn) IPO at HK$24.80 a share, after pulling in demand worth a staggering $60bn during bookbuilding. But when it started trading on June 1, the shares went up the first day before falling a lot. On June 18, they closed at HK$24.50, below issue price.

3SBio’s fate has been less severe since its debut on June 11. Although the stock declined in the days immediately following its listing, it later recouped the losses and is now above issue price.

These less than stellar performances, coupled with the wider market backdrop, have taken their toll on some other recent IPOs. AAG Energy Holdings this week became one of the first to fall victim to the volatility.

The coalbed methane (CBM) producer set off on the road on June 8, with plans to raise a maximum of HK$2.82bn at the base offering size, which could rise further with a 15% greenshoe option.

Its shares were marketed at HK$3.00-HK$3.70 or a 2015 EV/Ebitda of 8.8x-11/1x. But when it came time to price the IPO, the leads decided to sell the shares at the bottom end of the range, while also chopping the over-allotment portion to 8% of the base offering (see separate story).

“All the euphoria from the past months has given way to plenty of disappointments now,” said a source close to the AAG deal. “Some of that sentiment was reflected in AAG and other IPOs in the market.”  

In the past few days, Hong Kong has been at the centre of a flurry of issuance. Guolian Securities kicked off investor education on June 15 for a $500m listing. The same day, Vital Mobile launched its HK$650m trade, going head-to-head with a jumbo HK$17.50bn deal from Lenovo owner Legend Holdings.

Legend closed books at 5pm Hong Kong time on June 18, with the leads having sent out guidance to investors about potentially pricing the IPO at the top with books multiple times covered.

Universal Medical Services & Health Management Company, and Luzheng Futures meanwhile started pre-marketing their respective transactions on June 12, with plans to build books from June 22.

Red Star Macalline Group Corp, which launched its HK$7.22bn equity-raising on June 12, also closed bookbuilding on June 18 at 5pm. The same morning, the leads sent guidance of a mid-to-top pricing, which a banker on the deal said was not only down to where most of the demand had come from, but also keeping in mind the market’s jumpiness.

Adding to the flow on Thursday was Sky Light Holdings, which opened books for a $100m IPO (see separate story).

The flurry of deals is not unusual for this time of the year, said bankers. Most of these firms had filed a preliminary prospectus with the Hong Kong exchange earlier in 2015 and are ploughing on with their deals now despite weaker markets — but largely because of time constraints.

“We can’t wait,” said an ECM syndicate banker at a Chinese bank, who is working on one of these trades. “It’s now or never, because if we wait then the company will have to update its [second quarter] financials, so it will have to file a new prospectus — which will delay things.

"And then it will be summer, when liquidity is sapped and nobody wants to come to the market. Our target is to finish all IPOs by June 30.”

Other bankers meanwhile argued that the flood of listings had less to do with the impending summer lull and more to do with a forward-thinking attitude among bankers and issuers.

“Investors are not spooked just yet,” said an equity syndicator at an investment bank. “Everyone is talking about China’s bubble exploding soon but I don’t see it coming. People are being cautious but we are not expecting a massive crash — a correction yes, but not an explosion.

“But issuers don’t want to wait for that correction because they think they can get exciting valuations now rather than later. So they are comfortable enough coming out now when they don’t foresee any panic selling.”

Investors might not yet be running for the hills, but they are taking a stricter approach to stocks and valuations, said bankers. The rally in Hong Kong and China, which gathered tremendous steam from early April, took many valuations to record levels. And while the disparity in A-shares and H-shares has narrowed more recently, it is still at exorbitant levels.

But a head of Asia syndicate was quick to point out that the most affected stocks have been mid-cap names, rather than blue-chip companies. While the latest rally has seen the former rise by more than 100% in most cases, firms in the latter segment have only gained about 20%-30%.

This means that while valuing new IPOs against their listed peers is trickier than before, investors tend to look at each deal on a case-by-case basis, rather than comparing them against the broader market, said bankers.

There has been some pushback from the market and it was this that led AAG to price its deal at the bottom, bankers said, and for Red Star to be cautious with its own trade. However, investor resistance is more apparent in the blocks business. Discounts in overnight share sales have widened as expectation of a cheaper trade increases as volatility seeps in, said bankers.

In the IPO market, the equity syndicator at the investment bank said he had been getting “lots of complaints” about valuations since the uptick began.

“But if they see potential in a stock, even with crazy valuations, they’ll go for it,” he added. “Investors tend to look forward rather than at historical numbers.”