Rally for Asian IPOs proves short lived

In the week following the Greek election, the previously quiet Asian equity market encountered a promising rally accompanied by a veritable flurry of IPOs in Hong Kong.

Five deals entered the market, including flotations by Huadian Fuxin Energy, which raised $318 million via its Hong Kong debut; China Aluminium International Engineering, which launched a $221 million offering; and Inner Mongolia Yitai Coal, which launched a $1.5 billion deal.

The European debt crisis, together with concerns about China’s cooling economy and the potentially unsettling impact of the upcoming US election, has shaken investors’ confidence and heightened risk aversion.

Bankers have been saying for some time that greater clarity on the immediate future could provide the stability that Asian equity markets need for companies to test the public markets.

However, any suggestion that this is the beginning of the end of a quiet period for equity capital markets in Asia is probably premature. "It’s too early to say that problems are behind us," says David Douglas, global head of equity capital markets at Standard Chartered. "What we can say, however, is that there are some signs that the ECM market in Asia is on the mend – at the least there is a window of opportunity right now." Another equity capital markets banker says that launching IPOs during the brief periods of stability between bouts of volatility might become the norm over the coming months.

Copper producer China Nonferrous Mining Corp and Chinese restaurant chain Xao Nan Guo Holdings took advantage of the opportunity and returned to the market after pulling their initial plans to launch in June this year and September 2011 respectively. Xao Nan Guo came back after cutting its share price to HK$1.50, much lower than the initial IPO pricing, which ranged between HK$1.65 and HK$2.20, reflecting a lack of demand.

Demand for equity deals, and especially for risky IPOs, has fallen sharply in Asia. According to Dealogic data, in the year to date 177 IPOs have come to market in Asia (ex-Japan), compared with 275 deals during the same period last year. The combined value of deals so far this year is $18.5 billion, compared with $57.5 billion at the same time last year.

"The Greek election outcome will help improve global market sentiment and should help increase demand for risk assets, but the positive impact will only last in the short term as the fundamental problem remains unresolved," says Chi Lo, chief executive of HFT Investment Management in Hong Kong. "Efforts to solve the problems will cause more market volatility, thus raising market risk and risk aversion from time to time. It is difficult to see sustained and significant rise in demand for risk assets at this point."

The latest flurry of small issues might not be enough to turn the market around. "We are talking weeks if not months before these markets regain their poise, and the risk remains that you get one or two IPOs that take advantage of a window and then trade poorly and we are back to square one," says Rupert Mitchell, managing director, head of equity syndicate at Citi. "There is a lack of confidence with investors that has continued, and a few good days or even a strong week won’t change that fast. We need more positive headlines out of Europe, markets to nudge higher in the coming weeks and the IPOs that are in the market – largely from Malaysia – to perform well."

Disappointing market performance by Asian heavyweights Hong Kong and Shanghai have been overshadowed by the promising performance in the IPO market in Malaysia this year. Palm-oil producer Felda Global Ventures priced its IPO at $3.1 billion in Kuala Lumpur, making it the year’s second-largest IPO after Facebook; the upcoming listing of Integrated Healthcare Holdings, Asia’s biggest hospital operator, is set to raise M$6.4 billion ($2 billion) through its dual listing in Kuala Lumpur and Singapore. Both IPOs have political backing by the government and have had domestic cornerstone investors seizing the majority of shares and guaranteeing success.

"The Malaysian IPO market has been Asia’s bright spark recently," says Kester Ng, chairman of Asia equity capital markets at JPMorgan. "But at the same time, Malaysian IPOs are driven mainly by domestic liquidity, so it is not the most comparable framework by which to understand the Hong Kong and Asian IPO markets as a whole." Douglas agrees: "I wouldn’t read much into the successful IPOs in Malaysia. A company with sound fundamentals like Felda will usually perform well, especially with backing from the government and cornerstone investors lined up. The good IPO market in Malaysia doesn’t necessarily mean a recovery in the IPO market throughout Asia. As the saying goes – one swallow does not a summer make."

Malaysia accounts for just 5% of the IPO market in Asia so far this year, compared with China and Hong Kong’s combined market share of 13.4%. "Malaysia is only a fraction of the size of Greater China’s economy," says Douglas. "To date, Malaysia has never finished a year with a double-digit market share in the Asian IPOs, and I doubt this will be the year it does. Chinese companies will likely again dominate Asian equity capital markets this year and will mostly choose to list in Hong Kong or in Shanghai – not in Malaysia."

Analysts are in agreement that any meaningful recovery of the Asian IPO market will principally depend on concrete developments born from the last European Union summit in June and the European Central Bank meeting in July.

"The EU problems are not going to be solved any time soon, but the markets will react positively to seeing a credible roadmap towards fiscal and banking unity in Europe as well as meaningful central bank actions in China, north America and in Europe," says Ng. "The summer is expected to be relatively quiet, which is usually the case in the IPO market anyway, but if a credible roadmap is drawn up, the overall market sentiment should improve and as a result we could see more activity in the IPO markets in Asia."