It has been a good year for Asian equity capital markets issuance, although that only became clear during second half of 2017 when the tech sector made a big comeback. And this momentum will continue into 2018 according to investment bankers and investors who believe the tech sector will continue to lead the way.
However, many market participants expect the forthcoming year to show the reverse pattern to 2017. A busy first half is likely to give way to a less certain second half as monetary policy tightening weighs on fairly heady valuations.
Where 2017 is concerned, total IPO and secondary share sales across Asia (ex-Japan) stood at $108.6 billion at the end of November according to data provider Dealogic. This represented a healthy 19% increase from the $91.3 billion recorded during the same period in 2016.
It was not as strong as 2014 and 2015, which both topped $130 billion. But it is back above 2012 and 2013 levels (none of these figures include A-shares, which are still largely inaccessible to international funds).
There has also been a 16% improvement in the total number of deals from 1,072 to 1,245. More companies seem willing to raise equity thanks to a strong secondary market backdrop: a number of regional indices having hit decade highs.
A steady inflow of capital, a general improvement in post-listing performance and the emergence of new sectors all boded well for the region’s equity capital markets this year.
What set 2017 apart from last year was the fact that institutional money has returned to initial public offerings and follow-on offerings.
"There was a more transparent price discovery process in Hong Kong IPOs this year, which gave foreign investors – especially from the US and the UK – the confidence to come back into these trades," said Simon Galvin, head of Asia Pacific equity syndicate at Deutsche Bank.
Timing is everything for companies, which remain ever keen to avoid giving too much upside away by waiting until a rally looks mature. But if there is one thing investors are concerned about, it is whether equity markets are poised for a correction after an almost nine year bull-run.
Hong Kong led the pack in terms of 2017 performance, with the Hang Seng Index up 32% to mid-December. This was followed by India’s BSE Sensex up 26% and South Korea’s Kospi up 22% over the same period. Even the worst performing Asian market, Malaysia, still gained nearly 5%.
Valuations are expected to keep ticking up in 2018 because of strong earnings per share growth. A second positive factor is the return of institutional money to Hong Kong’s IPO market.
For much of 2016, asset managers had been on an unofficial buyers’ strike because of poor aftermarket performance. Partly this was down to a long run of financial sector deals, which had to be priced at or above book value at a time when investors felt their fundamentals did not warrant it.
By contrast, 2017 has witnessed a flurry of tech sector offerings, which have performed particularly well. This pipeline is likely to grow even bigger in 2018 as a number of fintech unicorns hit the market.
"We are going to see a continuing theme in the broader technology space as a number of large companies look to go public next year or the year after," said Deutsche Bank's Galvin.
Market participants are, therefore, entering 2018 in a generally upbeat mood barring unforeseen geopolitical conflicts.
"We expect 2018 to be active with many potential issuers galvanized to kick off their IPO processes given the positive market momentum in the second half," said Mille Cheng, co-head of Asia-Pacific ECM at Morgan Stanley. "We expect to see a continuation of inflows of China money through Stock Connect, and more follow-on financing as share prices are high relative to historic levels.”
One Hong Kong-based event driven fund manager said the market is better positioned for stable and sustainable growth because China’s own growth expectations are cooling after decades of breakneck expansion.
There is little doubt that Greater China will continue to host the bulk of the region’s equity deals, with India and South Korea potentially slowing down after a blockbuster year.
In particular, one deal could completely change the dynamics of 2018.
If Ant Financial, the Alibaba affiliate behind China’s largest digital payment service provider Alipay, comes to market it could potentially top Agricultural Bank of China’s $22 billion IPO, Asia’s biggest ever listing . However, this is now looking less likely after co-founder Jack Ma said this November that it would focus on growth and expansion over the next 12 to 18 months.
The other big offering in the pipeline is Lufax, Ping An Insurance’s online lending and wealth management platform. But the timetable for its mooted $5 billion IPO is not clear after Beijing decided to crack down on micro-lending platforms.
ECM bankers also commented that a number of sizeable private sector deals are waiting in the pipeline, potentially reversing the dominance of Chinese state-owned enterprises over the past few years.
But they also acknowledged that a number of Chinese state-owned enterprises remain the most likely candidates to go public in the next 12 months. As such, it remains to be seen whether the market will replicate 2016’s woes, when a number of mispriced SOE deals undermined overall liquidity and eroded public confidence.
China Tower, the country’s state-backed telecommunications tower operator, is tipped to raise up around $10 billion in what could be Hong Kong’s biggest IPO for some time.
Sinopec, China’s largest oil refiner, may also push forward with a $5 billion to $6 billion IPO of its marketing business next year after gaining board approval in May. If it proceeds, it will stand testament to the government’s mixed ownership reform, although sources close to Sinopec Marketing said it is still considering other options including a trade sale or private fundraising.
A number of companies in the financial sector are also gearing up for a listing in Hong Kong, including China Orient Asset Management, China Great Wall Asset Management, China Guangfa Bank and Bank of Gansu, among others.
Listing reform
Hong Kong’s latest proposal to change its listing regulations, which will be open for public consultation early next year, is seen as a game-changer for the city’s capital markets for the years to come.
“The debate about whether the Hong Kong market will allow dual-class voting will be an important theme for next year,” Morgan Stanley’s Cheng said.
The controversial weighted voting rights, while being criticised as a sign of deterioration in corporate governance, can in reality draw a massive flow of the so-called new economy companies to list in Hong Kong.
High-flying new economy companies that are potentially in the pipeline include car-hailing app Didi Chuxing, food ordering app Meituan-Dianping, live streaming app Douyu, electric and autonomous car designer Nio, and Tencent Music Entertainment.
