Mixed messages in Asia’s ECM revival

ECM bankers in Hong Kong and Singapore carry a look of worn-down disappointment lately, rather like Jeb Bush throughout the US Republican primary campaign: a dim belief that things might get better, but an awareness of overwhelming evidence to the contrary. There are almost no deals in Asian ECM and, worse, in several places there’s no good reason to expect there will be any deals in the near future either.

What to conclude, then, from the spate of deals that surfaced in Hong Kong, Singapore and Indonesia in late May? Is this an unplugging of a throttled ECM pipeline, to be followed by multitudinous new raisings? Or a series of one-offs?

It depends where you look.

The $1.1 billion IPO of BOC Aviation, part of the Bank of China group, in Hong Kong might fall into the former category. BOCA, which attracted cornerstone investments from the China Investment Corporation sovereign wealth fund and the state-backed Silk Road Fund, is hoped to be the vanguard of a glut of China-related deals that are queued up and waiting for launch.

BOCA, led by colourful British CEO and HSBC alumnus Robert Martin, is headquartered in Singapore, not Hong Kong, but did not give the Lion City much consideration when choosing a listing venue.

Fewer and fewer companies do so, which is why the $519.2 million IPO of Manulife US Real Estate Management there, priced at the top of the range, was such welcome news to the beleaguered Singapore Stock Exchange. It was the first truly new IPO in Singapore for a year and a half – in fact, it raised more than the $432.6 million the SGX raised in the whole of 2015 – and was a welcome new Reit in the city state that made itself the established Asian centre for the structures in the 2000s.

The Manulife deal is, though, trickier to decipher than it would first appear. 

Its assets are not Singaporean, or even Asian: Manulife’s IPO is backed entirely by US assets.

This demonstrates Singapore’s problem. The home of the Asian Reit is stymied because there’s practically nothing left there to stuff into a Reit. Take a look at that increasingly glorious Singapore skyline: it’s all wrapped up in investment trusts, and not without some controversy, since the only way to keep a Reit yield high is to raise the rent on its underlying properties.

“Singapore doesn’t have many more substantial portfolios to Reit,” says Kuan-Ern Tan, managing director and head of Singapore coverage at Credit Suisse (just one of the many problems facing the sector is the tendency of bankers to turn ‘Reit’ into a verb).

“Scale is critical, and while there are other real estate platforms looking to Reit, some don’t hit the minimum size threshold of at least S$1 billion in assets. The market is not keen to buy sub-scale Reits due to limited liquidity and the lack of economies of scale.”

In the old days, that was no problem, because one could simply list Reits made up of Malaysian, Chinese or Indian real estate. But the torpor or outright fraud around several S-chips – Singapore-listed Chinese companies of considerably varied ability and provenance – has put Singaporeans off new structures holding regional assets.

There are also bigger, structural and even social, impediments stopping more deals reaching the markets than the lack of momentum and positive sentiment which appear in all markets from time to time, and almost all of them at the moment. “The other issue in Singapore is the lack of sizeable entrepreneur-driven companies which are of the size to do a main board listing,” says Tan. “The one vibrant area in Singapore is in the internet space, but many entrepreneurs there are eyeing Nasdaq.”

US assets, Manulife would suggest, are an exception, but that’s not the same as a local pipeline. Besides, issues that would ordinarily have gone to Singapore rather than their local market no longer need to do so, as other southeast Asian markets gain maturity and offer incentives to stay local.

For evidence of this, witness Cikarang Listrindo, an Indonesian electricity supplier whose IPO was underway at the time of writing and was expected to raise at least $360 million. There was a deal roadshow in Singapore and Hong Kong but it chose to list domestically, which is little surprise given the great local liquidity in Indonesia – a phenomenon in evidence all over the region, particularly China, Thailand and the Philippines. 

While most companies will wait for greater stability in world markets and some sort of catalyst for improving sentiment before listing, sooner or later more deals will have to join these three. “With summer just around the corner, and for some the need to refresh financials, we are seeing the seasonal pre-summer rush,” says Steve Lam, part of the equity syndicate team at Citi Asia Pacific. “As such, the deals currently in the market represent some of the better quality names from banks’ pipelines as ECM bankers continue to filter deals more rigorously.

“It’s still very much proceed-with-trepidation mode, but hopefully if we see some positive debuts from these deals, which seem to have reasonable price/valuation ranges, we could be setting ourselves up for a more active post-summer holidays second half.”

Yet nothing is straightforward in Asian ECM, as JPMorgan learned when it became the first global investment bank to be named on a list of sponsors of Hong Kong stock exchange deals whose applications have been turned away by regulators. Shenhua Health Holdings had sought a spin-off from its listed parent Fufeng Group, but the application was sent back because of disclosure problems; since 2014, HKEx has publicly named the sponsors of such deals in an effort to make investment banks more accountable for the listings they bring.