Asian unicorns spur autumn's IPOs

A very strong pipeline of initial public offerings, led by Asia's tech unicorns, are putting Hong Kong’s equity capital markets in good stead to beat 2016’s overall issuance figures after a fairly lacklustre year so far.

Dealogic figures show the Territory has accounted for only 37.02% of the $57.5 billion in IPO and follow-on issuance across Asia (ex A-shares) in the eight months to end August. This compares to 47.22% in 2016 and 61.97% in 2015 (see table 1).  

The region as a whole has held up well largely because of India and South Korea, which will be explored in parts two and three of FinanceAsia’s autumn preview.

In Hong Kong’s IPO market, global institutional investors have been on the nearest thing to a buyers’ strike in recent years thanks to some well-publicised structural problems relating to unwieldy cornerstone-led offerings, which distort pricing and lead to poor secondary market performance.

But investment bankers and institutional investors describe the near-term pipeline as one of the best they have seen in a number of years.

This is partly thanks to the size of prospective jumbo offerings (from the likes of Sinopec Marketing and China Tower), but also the sectors they are coming from (less SOEs/financials and more tech/fintech, which offer growth and are far more likely to be properly marketed rather than placed with friends and family investors.

The jumbos

The big swing factor for the 2017 league tables will be whether Sinopec Marketing and China Tower list on the Hong Kong Stock Exchange before the end of the year.

Both deals are flagged as $8 billion to $10 billion offerings since they are seeking waivers to offer less than the exchange’s 20% minimum equity capital requirement. But even at lower end of their indicative size ranges, they will be almost four times larger than the region’s biggest IPO to date this year – Netmarble’s $2.34 billion IPO from South Korea.

Sinopec Marketing and China Tower also both entered the initial stages of their respective IPO processes a few months ago, which gives them plenty of time to complete their deals before the end of the year. Whether they do so is likely to be contingent on secondary markets remaining strong according to mainland-based bankers.

“It’s quite possible we’ll get at least one of them,” said one Beijing-based observer. “They both know the issuance window is fully open at the moment and there’s still more than three months of the year to go.”

China Tower is mandated to CICC and Goldman Sachs. Sinopec Marketing has a bigger syndicate comprising CICC, China Merchants Securities, CITIC Securities, Citi, Goldman Sachs and Morgan Stanley, although none of the six banks has been formally appointed yet.

The unicorns

Alex Abagian, Morgan Stanley’s Hong Kong-based head of Asia Pacific equity syndicate, also highlights how a strong primary and secondary market backdrop continues to be underpinned by flows into emerging market funds. “Asia EM has received net inflows of about $8 billion so far this year, with over 70% of it being active money” he said. “Last year, we were contending with outflows of about $18 billion over the same time period.”

In terms of the primary market, much of that attention is shifting to tech and fintech unicorns, which are likely to provide Asia’s most interesting IPOs this year.

Over the course of the first eight months of 2017, the sector provided 10.5% of issuance across Asia (ex A-shares) compared to 7.8% in 2016 and only 3.32% in 2015 according to Dealogic figures.

Certain tech stocks have performed extremely well, although the overall sector has been lumpy.

Tucker Highfield, Credit Suisse’s head of Asia Pacific equity capital markets syndicate, said, “Investors have shown some concern that a disproportionate handful of tech stocks have been the main contributors to the MSCI Asia ex Japan’s rally this year. “

Notably, the BAT troika of Baidu, Alibaba and Tencent are up 41.83%, 94.15% and 69% respectively in the year to Thursday’s close.

But Highfield also said the breadth of the rally is improving thanks to wider EPS upgrades across the sector.

Financial analysts have also noted that stronger than expected earnings across North Asia are coming from the tech sector. As UBS recently commented, “Tech continues to drive the bulk of upgrades, but leadership is shifting from Korean tech, where upgrades are slowing, to China internet stocks.”

This bodes well for the tech issuance pipeline, as does the genesis of many IPO candidates, which come from the BAT stable. Their parents’ track record should give investors an extra degree of confidence at a time when existing valuations are high and prospective spin-offs do not always have a well-established profits history.

“Public equity issuance has been very quiet since 2014 [editor’s note: when Alibaba listed], but we’re entering a new cycle now,” Highfield stated. “The large incumbents have been making considerable investment in the tech and fintech sector and private capital have followed them in. These new companies and spin-offs are only now getting to the stage where they want to go public.”

Bankers say it is also interesting to note where the tech companies are choosing to list. While some are opting for Hong Kong, the US is back in favour again (unsurprisingly given stocks are at post dot com peaks). 

Akram Zaman, head of Asia Pacific equity syndicate at Bank of America Merrill Lynch, told FinanceAsia, “There’s a natural tendency to follow the existing eco-system and where the most relevant peers are listed. Best Logistics is heading to the US where Alibaba and ZTO Express trade, while China Literature has opted for Hong Kong where the company feels its more natural home would be and its parent, Tencent, is listed.”

The fintech names in particular have chosen the US, following the lead of P2P lender China Rapid Finance, which floated in April. Aaron Arth, head of the Asia financing group at Goldman Sachs, explains why.

“There’s still a prestige element attached to a US IPO and liquidity is also higher for smaller cap stocks, which makes positive aftermarket performance more likely.” he commented. “But the main reason for choosing a US listing is because the world’s fintech comps are trading there and they provide ready pricing benchmarks.”

Arth also said the US IPO process makes it easier to fine-tune pricing right up to the last minute – particularly important for the technology sector where valuations are trickier to determine and are, therefore, vulnerable to sudden shifts in sentiment. By contrast, companies opting for Hong Kong are stuck with a fixed price range once their IPO is formally launched.

“These are companies whose growth could double, triple or quadruple over the coming 36 to 60 months,” Arth stated. “But investors know that not all of them will succeed. They’ve already identified some clear leaders and will take a portfolio approach with the rest.”

“Being able to fully market an IPO to the widest possible audience and make pricing changes at the last minute is the best way to fix a valuation for these kinds of stocks,” he concluded.

Such an IPO process is a far cry from Hong Kong where many market participants think the system is completely broken thanks to aforementioned cornerstone tranches (about half of last year’s deals are still trading below their IPO price).

The immediate pipeline

The autumn’s three big US-driven tech listings comprise Best Logistics, SEA Ltd and Qudian.

All three are coming to a market where a dozen or so tech unicorns have already listed this year and in the majority of cases, done very well. Alteryx and Cloudera are respectively up 56% and 41.6% from their IPO price, for example.

Alibaba-backed Best Logistics launched its New York Stock Exchange IPO on Thursday and is set to raise up to $931.5 million via Citi, Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley.

Next up is likely to be South East Asia’s most valuable start up, SEA Limited, which comprises the e-commerce brand Shopee, digital financial services brand, AirPay and online gaming platform Garena.

Morgan Stanley and Goldman Sachs are IPO lead managers for a company whose last public valuation was $3.75 billion in March 2016. Tencent has been a strategic investor since 2013.

Non-syndicate bankers expect a roughly $700 million deal to begin soft marketing next week ahead of an early fourth quarter launch.

A $500 million plus offering is pegged for Ant Financial-backed online micro-lender, Qudian. It numbers CICC, Citic, Credit Suisse and Morgan Stanley as lead managers.

A bit further down the line is online search engine Sogou, which is owned by Sohu.com and Tencent. Bocom recently assigned the group a $2.3 billion overall valuation.

Meanwhile, a handful of tech unicorns are close to launch in Hong Kong.

The furthest advanced is China’s largest online property and casualty insurer, Zhong An, backed by Alibaba’s Ant Financial, Ping An and Tencent. It is expected to begin pre-marketing for a $1 billion to $1.5 billion IPO on Monday under the lead of Credit Suisse, JP Morgan and UBS.

Tencent’s e-reader, China Literature, is just a few weeks behind with pre-marketing for an $800 million to $900 million IPO likely to begin around mid-September. Lead managers are Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley.

Finally, high-end gaming products manufacturer Razer has filed for an IPO via Credit Suisse and UBS. It is backed by Horizon Ventures, the venture capital arm of Hong Kong tycoon Li Ka-shing's empire, and was most recently publicly valued at $1.9 billion in April. 

How will this pipeline shape the end of year league tables? In part two of an ECM autumn preview, FinanceAsia will discuss how secondary market offerings may help Asia beat 2016’s $77.37 billion total (ex-A shares).