IPOs benefit as investors regain Asian risk appetite

Lower valuations combined with expectations for strong second quarter earnings have helped re-focus investors ‘minds on fundamentals rather than geopolitics, leading to a noticeable uplift in demand for initial public offerings and better secondary market performance across Asia.

The shift in sentiment, which occurred in mid-July, has provided a welcome boost for Asia’s beleaguered equity capital markets, which have suffered a difficult few months on the back of growing trade tensions between the US and its various friends and foes across the world.

Eastspring Investments typifies the mood swing after it changed stance mid-month. Colin Graham, CIO for multi asset solutions in Singapore, told FinanceAsia: “After taking a neutral position and reducing our risk exposure at the beginning of June, we began boosting risk assets and adding back to equities in mid-July.

“We believe it will be another storming quarter for earnings and not just in the US,” he added. “Asian equities could return high single digits to lower double digits by the end of the year.”

This should bode well for the reception and performance of a strong September pipeline led by billion dollar IPOs for old economy operators like Sinochem Energy and new economy ones such as electric car manufacturer NIO.

Gaetano Bassolino, head of Asia Pacific capital markets at UBS concludes that the overall mood has become a lot more constructive.

"In light of the softer market tone over the last few months, issuers might have to adjust their targets to match investor demand," he told FinanceAsia. “However, investors are clearly looking to put money to work again.

“There’s a very large pipeline going into the autumn and it is full of strong names,” he added.

Colin Graham

Graham agrees.

“Investors have become more choosy and selective,” he noted. “But overall, we’re still very positive on the tech sector and that’s where we want exposure.

“The disrupters are gaining market share and proven that they can continue to grow,” he continued. “Where else can an investor get 30% to 50% earnings CAGRs?”

However, this shift in attitude came too late to help those issuers, which had the misfortune to approach the market during the first two weeks of July.

Qilu Expressway, E-House, 7Road, 51 Credit Card, Redsun and Inke, were invariably forced to price at or towards the bottom of their indicative ranges, although as table one shows, property developer, Redsun, ended the month as Asia's best performer.

The opposite was true during the second half of the month as risk appetite returned. Notable beneficiaries were companies, which headed to the US, proving there is life yet for Asian companies there despite strong competition from Hong Kong and China.

Both social e-commerce platform Pinduoduo and software developer Opera closed their Nasdaq offerings one day early on the back of strong demand, which facilitated pricing at the top of their respective ranges. The two also traded up in the secondary market, although the former then dropped sharply after rumours about a government probe into fake products started to gain credence.  

CONFIDENCE RETURNING

A similar pattern has been evident in Hong Kong where the very strongest IPO contenders have felt confident enough to price at the top of their ranges again. These include Ascletis Pharma, which became the first bio-pharma company to take advantage of Hong Kong’s new rules on loss-making bio-tech start ups.

The company, which has developed China’s first Hepatitis C cure at the commercial stage of development, raised HK$3.568 billion ($399.82 million) at HK$14 per share on July 26. It traded flat when it opened on August 1.

Likewise, Hope Education, China’s second largest private education group by number of students enrolled, was able to net HK$3.2 billion ($407.74 million) at HK$1.92 on July 27.

Stronger market conditions have also provided a better backdrop for China Tower Corp (CTC), although the huge size of its deal (the world’s largest in two years) and a lacklustre retail reception meant that it came at the bottom of its range on July 31, raising $6.92 billion pre-greenshoe.

DBS among others believes this represents a very “attractive valuation” given the company’s IPO has come at a “50% discount to global peers”. The non-syndicate bank argues that CTC is a “key beneficiary of 5G network build-out and has the capability to provide an attractive dividend yield in the long-run.”

VALUE HUNTING

CTC’s reception perfectly underscores the current state of Asian primary markets; subdued, but still open and welcoming on a case-by-case basis.

The region’s secondary market performance also demonstrates that investors have been bottom fishing, particularly in the Philippines, which came back strongly during July (up 6.66%) and is now trading slightly above 15 times forward earnings again

Perceptions that value has opened up again have prompted positive foreign portfolio inflows into overall cash markets. Kotak Institutional Equities flags net inflows of $54 million into Indonesia, $114 million into South Korea and $76 million into India during July.

This marks the first month of positive inflows for all three countries since January.

Yet market participants remain all too conscious how swiftly this situation might reverse.

Graham highlights two such risk factors. Few analysts have been able to successfully second-guess what US President Donald Trump will do next, and then there is the path of the US dollar.

Graham highlights the impact the repatriation of overseas earnings is having on the currency: a trend that has yet to fully play out.

“Second quarter figures aren’t out yet,” he explained, “but we forecast that about 50% to 70% of the $600 billion to $700 billion potential earnings to be repatriated has already been remitted back to the US.”

“If we've underestimated these flows, then further dollar strengthening could follow during the second half, which would push demand for the dollar higher and wouldn't be a good environment for Asian asset returns," he continued. "But if our estimates and outlook are accurate, then the dollar is more likely to move sideways and possibly lower, providing opportunities for investors hunting for value in Asia."