China's A-share market will attract much attention in 2010, partly because it is likely to beat last year's fundraising record, and partly because it is expected to see some highly-anticipated initial public offerings that will demonstrate the Chinese regulators' efforts to reform the financial markets.
The A-share market will continue to absorb massive fundraising deals, particularly by big state-backed enterprises. As the Chinese government tightens its surveillance on bank loans after excessive lending in the first half of 2009 and curbs the development of industries that are not entirely in line with the authorities' economic blueprint, companies will have to rely more on the equity markets to raise money for building new factories and shops, or to fund new projects.
Since China's economy has been relatively less impacted by the global financial crisis, the earnings of Chinese companies, the most important parameter in determining how much a company can raise in an IPO, have also been less affected.
Further, low interest rates and limited investment channels in China will continue to drive retail investors, who are sitting on Rmb26 trillion of bank account savings, to the stock markets -- their fear of overpaying being trumped by a fear of missing out.
The long-awaited IPO of the Agricultural Bank of China (ABC), if it happens this year, will showcase China's efforts to turn an indebted government-guided lender, which was once dismissed as a candidate for public listing, into a transparent shareholder bank. ABC will be the focus of government-driven restructuring and cash injections in order to meet the regulatory requirements for a listing on the Shanghai Stock Exchange (SSE).
The securities authorities are also expected to create an international trading board on the SSE in the second half of this year, where listing rules and surveillance of public companies will be in line with global trading standards in order to cater for global companies such as HSBC. The existing rules will remain unchanged for domestic securities, meaning it will be 'one exchange, two systems'.
The Shanghai IPO market will kick off 2010 with an offering by China XD Electric Co, the nation's biggest high-voltage electrical infrastructure equipment maker, which plans to raise about Rmb7.72 billion ($1.13 billion) through the sale of 1.3 billion A-shares, according to the SSE. The Xi'an-based company plans to sell about 40% of the stock available to institutional investors through an offline tranche from January 18, while the remaining 60% will be offered to all investors on January 19.
The decision by China XD Electric to list in Shanghai, as opposed to in Hong Kong, is in line with a general trend, as described by one market watcher.
"The Shanghai bourse is receiving large government-backed financial institutions, energy and industrial companies, while [Chinese companies listing on] the Hong Kong stock exchange are from a wider range of sectors," said Yip Sheung-chi, a director at First Shanghai Securities. "The big finance and energy companies would prefer to have their shares listed on both markets," he added.
China Securities Regulatory Commission (CSRC) has said that Huatai Securities, one of the underwriters of China CNR's $2.04 billion Shanghai IPO, received approval last month to raise at least Rmb10 billion in a share sale in Shanghai this year. The commission didn't provide further details about the deal.
Observers also concur that China Merchants Bank's postponed rights issue may take place in the first six months of this year. The country's sixth-largest lender said in August it planned to raise Rmb18 billion to Rmb22 billion via a rights issue in Shanghai and Hong Kong to meet the government's increased requirements on banks' capital adequacy ratios, but later put the plan on hold. The lender said it would offer 2.5 new shares for every 10 existing shares.
Analysts and bankers expect several other financial institutions to replenish their capital bases in the first half of the year as well, after a lending binge last year that saw Chinese banks provide a record Rmb9.21 trillion of credit to businesses under government orders to pump cash into the economy.
Agricultural Bank of China's IPO is likely to be one of this year's largest new A-share listings and also one of the largest dual listings in Shanghai and Hong Kong, but may not come until late in the year.
"We are hoping and trying to list by the end of this year," Pang Gongsheng, vice president of ABC, has been quoted by Chinese media as saying. He said the bank is undecided about a detailed timetable and about the size of the IPO, but some market observers predict the deal could top $20 billion with 60% of the shares sold on the SSE and 40% on the Hong Kong bourse.
The Beijing-based bank wrote off $111 billion of bad loans in November 2008 before completing its conversion into a joint stock company early last year. Its mountain of non-performing loans (NPLs) is a legacy of its role as a provider of policy-driven credit to the farming community and rural enterprises, which includes around 900 million people in China.
ABC is China's only big state lender that has yet to go public. Its restructuring is being widely watched as it is expected to put an end to an era in China's banking sector that has seen the government spend tens of billions of dollars to clean up balance sheets every year. ABC had more than Rmb7 trillion in assets and 450,000 employees by the end of 2008, according to its website, its NPL ratio was 4.32%, compared to an average of 1% for the three other banks that together with ABC make up China's 'Big Four' lenders.
Another highly anticipated deal is HSBC's planned share offering on the Shanghai Stock Exchange, although its success will depend on the details of the new rules from Beijing that will govern the international trading board.
HSBC's executive director, Peter Wong, said at a press conference in Hong Kong recently that the bank is ready and looking forward to an A-share listing, but that it has to wait until the Shanghai bourse's regulations and rules are ready to receive a global company. HSBC is already listed in London, Hong Kong and New York.
Analysts predict the Shanghai listing of HSBC, the first-ever by an international company on the Chinese mainland, will attract mainland investor interest.
"Mainland investors are enthusiastic about new share sales, even small stocks are likely to be highly oversubscribed," said Tang Sing-hing, research head at Redford Securities.
Sichuan Expressway's Rmb1.8 billion Shanghai IPO in July last year, which was the first new share sale after a nine-month moratorium in China's equity capital market, underscored the demand for new equity. The toll-road operator surged in its Shanghai debut on 27 July to a close of Rmb10.90, which was three times its IPO price and more than three times the price of its Hong Kong-listed stock.
In the same week, China State Construction Engineering jumped 56% on its debut, after receiving Rmb1.85 trillion worth of orders for its Rmb50.2 billion ($7.3 billion) IPO. That's more than the market capitalisation of the main bourses in Norway, Russia and at least 45 other nations. The deal was the second largest IPO in the world last year after Brazil's Banco Santander Brasil, which raised $7.52 billion and listed on the New York and Sao Paulo stock exchanges.
This year, Chinese regulators are expected to encourage more fundraising activities to boost equity supply, as part of an effort to prevent asset price bubbles. However, property developers are an exception and mainland property developers are unlikely to be among the A-share IPOs in 2010.
The Chinese premier, Wen Jiabao, said late December that the government would use taxes and interest rates to stabilise the property market.
"The government is worried about overheating in the property sector, so regulators are setting higher thresholds for share issuers from the property sector," said Lee Hing-yin, a Shanghai-based director of research at Colliers International, a global real estate service firm. "Although a share sale in Shanghai means lower listing costs and higher price-to-earnings ratios," he added.
Lee said the mainland property companies which rushed to sell shares in Hong Kong last year are having to contend with the difficulty of converting their proceeds to Chinese yuan and transferring them to the mainland where most of their projects are located.
The rivalry between Hong Kong and Shanghai will be keen this year. While Shanghai aims to set new records in terms of fundraising, there are several large listings in the Hong Kong pipeline, including Rusal, the world's largest aluminium producer which will start the bookbuilding tomorrow for an IPO of up to $2.6 billion, and American International Assurance, Asia's largest life insurance company.
Big state-owned enterprises are likely to seek a dual listing on both exchanges, however. China still has many restrictions on movements of money in and out of the mainland, except for payments associated with imports and exports, and the government will not allow large SOEs to sell shares in Hong Kong unless they agree to split their offers with Shanghai, market watchers say.
PricewaterhouseCoopers (PwC) predicts that there will be 10 companies listing on the SSE's existing board this year and another five on the planned international trading board, raising a combined Rmb250 billion. That number could stretch to over Rmb300 billion if the planned international trading board launches at "a good time", said Edmond Chan, a partner with the firm's capital market services group.
PwC said there will be 55 IPOs raising a combined HK$299.5 billion ($39 billion) on the Hong Kong stock exchange's main board this year.
"The Shanghai IPO number will still be small but the exchange will be home to large state-run enterprises with all of them making massive share sales," said Benny Wong, a research director at the investment banking arm of Bank of Communications.
In 2009, the SSE saw nine companies raise a combined Rmb125.1 billion through new listings and six of them raised more than Rmb10 billion each, according to Dealogic. The SSE was a close third globally by total funds raised last year, after the Hong Kong Stock Exchange, which saw $23.9 billion of new listings, and the New York Stock Exchange with $16.96 billion. However, in terms of number of IPOs, the SSE didn't make the top 10.
The Shenzhen Stock Exchange, known as the second-tier board in China, will see a larger number of IPOs, but a smaller amount of funds raised.
PwC projects that 103 small- and medium-size companies will raise an estimated Rmb70 billion by listing on the Shenzhen bourse this year. In 2009, 88 companies raised a combined Rmb64.9 billion from IPOs on the Shenzhen exchange.
