After a summer rout, the first big sparks of activity in Hong Kong's ECM market emerged just last month when China Reinsurance, China Huarong Asset Management and CICC priced chunky IPOs in quick succession.
While positive for overall volumes from the city, their transactions however left much to be desired from a sentiment perspective, having been driven predominantly by China state-owned money.
And then came Dali Foods, which is building books at the moment for a HK$10.4bn ($1.34bn) float. It has brought in just three cornerstones to take up less than a quarter of the listing and has picked only two banks to lead its transaction. In comparison, China Re, Huarong and CICC had multiple joint global co-ordinators and placed out between 55% and 70% of their respective deals to cornerstones, with the government almost appearing to have a mandate to ensure the listings succeed no matter what.
Dali’s strategy reflects a big — and necessary — turning point for the city's IPO market.
For starters, Dali is not just another government backed entity. It is privately owned, top of the food and beverages sector, boasting strong credentials and valuations that are reasonable enough to whet investors’ appetite. So much so that its books were actually covered by the end of the first day of bookbuilding.
What the company is offering is a refreshing change. It is one of the first IPOs in a long time from a firm not operating in the financial sector and to offer a bookbuilding process that reflects its intentions to have a proper global distribution. It is not counting on China money to push its deal through and that's a good sign for the market and for deals in the pipeline.
This is because Dali’s outcome will provide a real gauge of what institutional investors are feeling right now. Whether investors are still risk off and cautious about China, or willing to jump in for the right valuation and the right name, will be shown by Dali’s performance.
Admittedly, the number of deals of its size expected before the year end is limited, but even smaller issuers are closely watching Dali to understand the market sentiment. Kudos should be given to the ability of big Chinese SOE backed firms to pull off multi-billion dollar listings, but in the broader scheme of things those IPOs serve as a poor benchmarks as they fail to reflect the views of global institutional accounts.
For Dali, the pressure is to not to push up valuations simply to brag about a successful trade, but instead allow the market to determine where is fair value and ensure demand comes from the right quarters. That will be the proper test of investor appetite and will lay the groundwork for deals to follow.