Sweeper faster than speeding bullet train
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E-mail China Daily, June 6, 2014
It seemed like just another day on Hong Kong's stock market. At about 9:30 am, trading kicked off in a whirl.
But on May 22, the results of two initial public offerings confounded expectations.
Two chairmen of two companies posed for photos. One was Cui Dianguo of China CNR Corp Ltd, the nation's top high-speed train builder and the world's largest electric locomotive supplier. The other was Ng Wing-hong of Baguio Green Group Ltd, a Hong Kong company that handles the mundane business of keeping the streets, wet markets and airport clean in the special administrative region.
Nobody expected the road sweepers to outpace the bullet trains, but that's just what happened. Upon listing, only 65 percent of the shares of CNR's Hong Kong public offering were taken up, and they were priced at HK$5.17 (67 US cents), the lower end of the marketing range.
But Baguio Green's Hong Kong offering was oversubscribed by 429 times, and its shares were priced at HK$1.20, the very top of the range.
CNR's case isn't unique. Many companies from the Chinese mainland, even those confident enough to launch huge IPOs, have gotten the cold shoulder in Hong Kong.
On April 29, Henan-based WH Group Ltd, the world's largest pork producer, postponed its $5.3 billion debut in Hong Kong even after cutting the offer size by two-thirds. Demand was so weak that an underwriting team of 29 banks couldn't sell the shares.
In March, Harbin Bank Co Ltd set out to raise more than HK$10 billion. It ended up with just HK$8.77 billion, pricing the issue at the lower end of the range. The Hong Kong tranche of the issue was undersubscribed, so 219 million shares were allocated to international buyers.
"It has been increasingly tough to sell new listings in Hong Kong, especially the big ones," said Kevin Leung, director and strategist at Haitong International Research Ltd. "More and more long-onlys - traditionally big players in IPO subscriptions - are no longer keen to participate.
"IPOs performed badly in the past two years. A significant number of them have been trading below their issue prices," Leung said. "Buying them has cost institutional investors a fortune, let alone retail investors. In general, Hong Kong people are skeptical."
Big IPOs start with cornerstone investors. That involves a lockup period during which they can't sell any of their shares. However, Leung said, major institutional investors such as social security funds and sovereign wealth funds have become reluctant to accept lockups for fear of losing money if IPOs perform badly.
"Without securing these investors, it's even harder to launch large offerings," he said. WH Group was willing to list without cornerstone investors, a rarity in Hong Kong.
Leung added that big names are often too proud to price their shares cheaply.
"Sometimes their valuations are even higher than their listed peers. It might be legitimate, as these companies are industrial leaders. But the aggressive approach is not necessarily popular among investors. People used to think they could only get shares at the listing price or not at all. Now they believe the shares will decline sooner or later, so why worry?"
Market sentiment isn't helping, said Law Ka-chung, chief economist and strategist at Bank of Communications International Trust & Investment Co. "IPO activity reflects the overall performance of the stock market. Right now, many have negative expectations."
Hong Kong's stock market has been volatile this year. The key Hang Seng Index peaked early in the year, reaching 23,340 points on Jan 2. It neared 21,000 twice in February and March and was back near 23,000 at the end of May.
These months didn't see much IPO activity. Statistics from the stock exchange show there were 62 new listings from November through January but only 12 for the three months ended in April.
"There is a 'short China' theme," Law said. "At the moment, investors are not willing to buy mainland companies aggressively. Hong Kong local funds have been avoiding mainland stocks."
"After decades of high-speed investment-driven growth, there must be some bubbles in China - not just financially, but economically," Law added. "The risk is mounting, especially in the real estate sector.
"At some point, the bubbles will bust - most likely, mainland and Hong Kong property markets will collapse together. Before that pressure is released, investors will need to remain vigilant and be prudent ... we need to see signs of deleveraging first."
According to a report released by the Hong Kong Investment Funds Association in May, only 17 percent of fund managers surveyed recommended being overweight in greater China equities, compared with 60 percent at the beginning this year.
The survey also found that 66 percent of fund managers are taking a neutral stance on "China concept" stocks, compared with 30 percent in January.
"The Hong Kong stock market has lost steam," said Bruno Lee Kam-wing, executive committee member of the HKIFA. "The slowdown of China's economic growth is within expectations. But fund managers are cautious about the second quarter.
"Investors are on the fence as they wait to see whether China's reform policies function as well as designed. If the reaction is positive, given the low market valuations, we are likely to see a return of confidence in the third quarter. "
"The second and third quarters are traditionally quiet periods for IPO activities in Hong Kong. We aren't concerned enough to revise down our annual fundraising forecast of HK$200 billion," said Louis Lau, partner of the Hong Kong capital markets group of KPMG China.
"Currently, there's no support in the market for 'mega' IPOs of more than HK$10 billion. But we see a strong pipeline ahead.
"Demand for smaller IPOs of HK$500 million to HK$1 billion is fine. In the fourth quarter, which is usually the peak season, there could be two to three mega offerings."
"We look forward to the benefits of some of the Chinese reform measures and the mini-stimulus program unveiled most recently," said Edward Au, co-leader of the public offering group of Deloitte China, in a report published in April.
"The IPOs in the wings will shore up Hong Kong's IPO market to raise HK$170 billion to HK$210 billion in proceeds out of 85 to 100 IPOs for the full year of 2014."
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