Pipeline suggests another busy year for Chinese IPOs in the US

The first China IPO has yet to hit US markets this year, but an industry insider predicts another busy year as many small and mid-size private sector companies continue to favour a listing in New York via American depositary receipts (ADRs) over markets closer to home.

He is also positive that the key DR market innovations in Asia last year, including Indian DRs, Hong Kong DRs and the ability to trade ADRs in Singapore, will continue to develop as global issuers try to tap into new pools of investable capital outside the US.

Last year marked a record in terms of the number of Chinese companies that listed in the US through the use of American depositary receipts (ADRs). A hectic December with seven Chinese trading debuts pushed the total number of new Chinese listings on the New York Stock Exchange and Nasdaq to 35 – up from the previous record of 27 in 2007 and more than three times the 11 listings in 2008 and 2009 combined, according to Dealogic data.

Deal sizes have come down in recent years, however, and the $4 billion of IPO funds raised by Chinese companies in the US last year was well short of the $6.6 billion raised in 2007. The largest among the Chinese IPOs last year was the $350 million offering by wind turbine manufacturer China Ming Yang Wind Power Group in late September, which was arranged by Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley. But of the 35 new listings, 19 were smaller than $100 million and 30 were below $150 million.

However, Greg Roath, head of Asia-Pacific depositary receipts at Bank of New York Mellon, says the flow of Chinese companies seeking to tap the US markets for funds is showing no signs of slowing down.

“Whether we will see another year with more than 30 listings, I don’t know, but the pipeline is still just as active as it was a couple of months back so all indications are that it could be equally busy this year,” Roath said in an interview with FinanceAsia last month. At that time, BNY Mellon was “actively in meetings with a good 15 companies” at various stages of the listing process and was also aware of other issuers at the planning stage, he added. “So, the pipeline looks set to repeat, barring any external shocks.”

The ADR issuance will be supported not only by the need for capital among Chinese companies, but by a continuing desire among US investors to diversify their portfolios and gain exposure to equities outside their home market. According to fund tracking service EPFR Global, aggregate fund flows to emerging market equity funds totalling $92 billion in 2010. During the same 12-month period, there was a total outflow of $62 billion from all developed market equity funds, including $36 billion from US equity funds alone. The primary beneficiaries of these new fund flows into emerging markets were emerging Asia and Latin America. Emerging Asia alone attracted flows of $50.4 billion, followed by Latin America with $17.8 billion.

Bank of New York Mellon is one of the four global depositary banks and as of the end of last year acted as the depositary for more than 2,100 American and global depositary receipt programmes for companies in 67 different countries. It was also the only DR bank involved in the Singapore Exchange’s (SGX) efforts last year to make US-listed ADRs available in Singapore.

The initiative saw ADRs of 19 Chinese companies start to be quoted on a new Singapore board, referred to as the GlobalQuote board. The companies include those that are only listed in the US, such as search engine provider Baidu, online travel agency Ctrip.com and solar cell manufacturer Suntech Power, as well as 10 issuers that have a primary listing in Hong Kong but are also available through US-listed ADRs. That latter group include Aluminum Corp of China, PetroChina and the three state-owned telecom operators, China Mobile, China Telecom and China Unicom.

So far, trading volumes on the new board have been okay, Roath said, and have been picking up recently. However, BNY Mellon is working on a solution to improve the back-end settlement situation for the single-listed ADRs to ensure that the DRs are available to the broker on the settlement date in Singapore. The improvements will prevent unwanted additional costs for the broker associated with a delayed settlement and should also help boost the liquidity in these ADRs, he said.

As of now, the trading volume is greater in the ADRs based on companies that are listed both in Hong Kong and the US – even though these companies can already be traded in the Asian time zone. The settlement issues are believed to be part of the reason for that, as it is currently easier to ensure the availability of ADRs based on companies that also have ordinary shares listed on an Asian stock exchange, referred to as dual-listed ADRs.

Roath noted that the SGX has indicated plans to expand the number of available ADRs from the current 19 and said BNY Mellon is hoping for that to occur this year. He also wouldn’t be surprised to see more DR banks get involved, which would allow the SGX to gain access to a broader range of ADRs.

“We certainly know that there is interest from the other depositary banks and that is a positive sign. If they are interested, then collectively we must all feel positive about that platform (the GlobalQuote board) as a vehicle for additional trading,” he said. 

BNY Mellon is also optimistic that there will be more Hong Kong DRs (HDRs) and Indian DRs (IDRs) this year, following last year’s debut listings by Brazilian mining company Vale in Hong Kong and Standard Chartered in India. Although BNY Mellon is not the depositary bank for Vale’s HDRs (J.P. Morgan is), the bank has had inquires from other potential issuers about the instrument, which bodes well for the development of this market. Since Vale didn’t issue any new shares in connection with the listing, the real test of the HDR market will come when the first company offers HDRs for sale to the public and we get some liquidity into these instruments.

According to media reports, Japan conglomerate SBI Holdings is pondering a dual listing of its financial unit in Tokyo and Hong Kong (through HDRs) this year, which could make it the first Japanese company to sell shares in Hong Kong. However, Roath said BNY Mellon is seeing some interest in Japan beyond SBI for a Hong Kong listing. There is also ongoing interest from Europe, although some of those companies may be looking to list ordinary shares rather than HDRs, he added.

Together with other banks, BNY Mellon has also held several IDR roadshow events in London and New York, which have generated some interest for that product. However, Roath noted that the requirement to raise capital in connection with an IDR listing may be hampering the development of that market for now.

“It might benefit the product if they were to drop that requirement,” Roath said.

That seems to contradict the situation in Hong Kong where market watchers argue that capital raisings are necessary to create liquidity in the HDRs and say that the thin trading volumes in Vale’s HDRs are a direct result of its decision to listing by introduction, i.e. without issuing any new shares. However, Roath argues that there are different dynamics at play in India where one key reason for companies to list IDRs is to be able to award their local employees with locally-listed stock. And they may not necessarily want to raise new capital to be able to do that.

Hence, by dropping this requirement, the regulators “could unlock some additional potential,” he said. On a direct follow-up question, Roath agrees that initially at least, IDRs will be mainly suited for companies that are already active in the country and that have large employee bases here.

“Over time you may see others, although when it comes to tapping international capital, from what we see, international companies are looking more towards Greater China, which probably means Hong Kong.”