Hong Kong reopen for ECM business, for now

By the close on Monday, Hong Kong’s Hang Seng index had put on 2.5% while the Shanghai Shenzhen CSI 300 Index had risen 15% as the surprise policy easing in China on November 21 and start of the Shanghai-Hong Kong Stock Connect programme sent investors rushing back into equity markets.

Both benchmark indexes have since given back some of those gains but for now the window for equity capital markets appears to have reopened.  

Ping An Insurance raised $4.75 billion in a private placement on December 1, landing a group of 10 investors including Temasek under the lead of Morgan Stanley. It was the second attempt by mainland China’s second-largest insurance firm to come to market after it failed with a private placement on November 7.

Meanwhile, CGN Power, China’s largest nuclear energy producer, raised HK$24.52 billion ($3.16 billion) through an initial public offering on December 3. The retail tranche was oversubscribed 250 times, surpassing HK Electric’s HK$24.1 billion listing in January to become the biggest IPO in Hong Kong so far this year. 

That accolade could yet be short-lived. Dalian Wanda Commercial Properties began taking orders Monday for an IPO that could net it $3.8 billion pre-shoe by year-end. It has already locked up $2 billion worth of demand from 11 cornerstone investors, including Och-Ziff Capital Management, Kuwait Investment Authority (KIA), China Life Insurance, Ping An Insurance and Dutch pension fund APG.

Other Hong Kong deals in the works include BAIC Motor Corp, which is seeking to raise up to $1.6 billion pre-shoe, and Xiabuxiabu Catering Management, the fast casual restaurant operator in China that’s looking to raise up to $146 million pre-shoe.

But for how long

Chinese investor sentiment has improved since the People's Bank of China cut rates on November 21 and pledged to inject extra credit into the financial system.

Still, some bankers and analysts have their doubts as to how long the euphoria will last. Dalian Wanda, in particular, has attracted some scepticism as it is attempting to come to market at an exceptionally difficult time for Chinese real estate generally. Despite the government’s efforts to stimulate the property market, it continues to struggle as housing sales slow, construction drops off and banks become more cautious.

This rush by companies to market represents a turnaround from the six-week lull seen across Asia this autumn as equity markets were pummelled after the IMF cut its global growth forecast to 3.8% from 4% and the Ebola outbreak hit parts of West Africa.

“Markets were going up and down 3% to 4% every day, so no one wanted to do anything," one banker told FinanceAsia. "You’ll either make a lot of money or lose a lot of money, and investors would rather stay on the sidelines, [especially] going into year-end.”

During this time in September and October, a number of block share sales plummeted in secondary trading, making investors even more skittish and potentially damaging relations between bankers and some key investors, specifically the macro hedge funds that would typically support these deals.

Some of the hedge funds that came into block trades during this time wound up selling quickly after they realised they were holding most of the stock. So a number of deals that priced at the low end of expectations then fell even further.

“The conventional launch at 6:30 in the evening with a couple of anchor orders and [building] the book overnight has not been working,” a second banker said in November. “There’s probably two-thirds from the original squad of 12 [hedge funds] that are just sitting back and are at times completely out of the market,” he said. 

On September 30, China Investment Corp, the nation’s sovereign wealth fund, announced plans to sell off some of its 13.8% stake in Noble Group, one of Asia’s largest commodity houses. The sovereign wealth fund sold part of its stake at a 5% discount at S$1.32 per unit on September 30, the bottom end of the indicative price range up to S$1.35, and raised $311 million from the accelerated block.

Despite CIC’s efforts to reassure investors it would maintain a 9.4% in Noble stake after the share sale was completed, Noble’s stock tumbled 7% from S$1.35 per unit on September 29 to S$1.26 on September 20. Shares fell to S$1.24 on October 2.

Noble’s shares dropped further later in the month after reports of 18 blocks of 200,000 or more shares were sold between S$1.17 and S$1.20 per unit on October 28. Shares closed October 30 at S$1.15.

On October 7, private equity firm CVC sold roughly 186 million shares, or a 16.1% stake, in Jintian Pharmaceutical. The deal priced at HK$3.29 per unit, the bottom of its targeted price range, and the shares then fell 15% in the first two days of subsequent trading. They remain well below the placement price, closing at HK$2.63 per unit on December 9.

In addition, Telefonica Internacional sold a 2.5% stake in China Unicom on November 10, raising $859 million. Pricing came at HK$11.14, again at the bottom of the discounted target range, and then shares fell further in the aftermarket.

“[Noble] was a train wreck and Jintian was a disaster as well,” the first banker said.

Mental blocks

With Hong Kong now seemingly reopened for business, there's a more cautious tone to proceedings. How long that lasts, though, is another matter.

“Volatility has been high over the last few months, so obviously [banks have to be] more savvy to pitch these deals at the right level,” Philippe Espinasse, a former ECM banker and author of “IPO Banks” and “IPO: A Global Guide”, told FinanceAsia. “If you get it wrong, it’s going to tank in the aftermarket.”

When conditions are volatile, investors are far less likely to participate in equity markets in general, let alone in block trades. “So you end up launching blocks with less initial coverage than you would have had under normal circumstances,” Espinasse said.

“Even if the deal does get done, you often end up with the wrong sort of people participating [who don’t trade much in the aftermarket.] So it will be barely covered and/or includes the wrong accounts and will ultimately result in the share price falling.”

Some bankers said it is reckless to push block trades when markets are volatile. "You’re forcing unnatural acts and [the deals are pushed] for the wrong reasons,” the second banker said.

However, what the client wants, the client ultimately gets.

“Frankly, bankers are not known for turning down business. You try, and if you get it done, you get your fees. If it trades down, that’s bad luck but you move on,” Espinasse said. “But if the client is set on doing it, another bank will do it if you don’t. That’s the sad reality.”

In addition, the block business in Hong Kong is becoming increasingly competitive.

“Blocks [in Hong Kong] are getting more competitive and compared to performance in previous years, the margin for upside is smaller,” a third banker said. “There’s a focus and competitiveness around every single block [in Hong Kong], more than in New York where there’s a greater flow of transactions and less impact of one deal on a league table.”

The bulk of banks’ revenues come from equity capital markets this year. ECM accounted for some $3.66 billion worth of investment bank revenue from December 1, 2013 up to November 12, 2014, followed by debt capital markets ($2.45 billion) and M&A ($1.12 billion), according to Dealogic data.

Blocks accounted for 80% of the total ECM volumes in Asia ex-Japan.