February 22, 2012 / 1:42 AM / 7 years ago

DEALTALK-Bankers turn to 'shadow books' as Hong Kong IPO market stutters

* Hong Kong stock rally fails to ignite IPO market issuance

* Banks, issuers counting on ‘shadow books’ to get IPOs done

* Europe debt, China slowdown concerns weigh on new listings

By Elzio Barreto

HONG KONG, Feb 22 (Reuters) - Hong Kong’s IPOs have suffered their worst start since 2009, failing to ride a stock market rally and forcing bankers in Asia’s main centre for new issues to pin their hopes on a $700 million oil sands company offering to throw open the floodgates.

A nearly 16 percent rally in the local stock market since the beginning of the year should have given executives confidence to proceed with stock listings, and allowed bankers to clear their deal backlog and sign up more clients to hit the IPO track.

Instead, companies with offerings on the docket remain on the sidelines. The few that are proceeding are planning deeper discounts and resorting to ‘shadow books’ to make sure the deals are infallible.

The lack of activity is both a grim sign of CEO confidence and also a potentially dire warning for investment bankers in Asia, where equity capital market fees make up about two-thirds of the investment banking revenues at most firms, according to Thomson Reuters data.

“Investors are very choosy and will continue to be very choosy,” said Philippe Espinasse, a former investment banker with Nomura and UBS in Hong Kong and author of ‘IPO: a Global Guide’.

Nearly half of the up to $700 million IPO of Sunshine Oilsands, a Canadian oil explorer, has been sold to powerful Chinese state-backed entities, leaving little room for the deal to collapse.

However, a truly thriving IPO market is one where retail and mutual fund investors queue up to buy shares, something that is still missing in Hong Kong because of lingering concerns over Europe’s debt troubles and a slowdown in China’s economy.

Besides signing up so-called cornerstone investors, who commit to buying a chunk of the IPO and keeping their stake for a minimum period of time, bankers will sometimes also run a ‘shadow book’ when the market is weak, such as now.

The term refers to a roster of potential buyers that gives an early indication as to what demand will be before banks finalize a price range and launch the IPO. The shadow book gives banks and the IPO company some comfort to go ahead, or not, with the deal, as was the case with Sunshine Oilsands.

“It’s particularly important in a market like this. In a bull market you just launch and go,” said the head of equity capital markets (ECM) at an international investment bank in Hong Kong who was not authorized to speak publicly on the matter and thus requested anonymity.


The slump in issuance is a particular cause for concern in the financial industry after estimated fees on Asia-Pacific offerings tumbled 21 percent to $4.9 billion in 2011 from 2010, prompting companies, including Royal Bank of Scotland and Samsung Securities Co Ltd, to slash jobs or pull out altogether from the equities business in the region.

Still, there is no dearth of companies wanting to list, with more than 80 active IPO applications in Hong Kong through the end of January. London-based high-end jeweller Graff Diamonds joined the ranks of IPO candidates in Hong Kong, filing for its up to $1 billion offering last week.

Others like China Everbright Bank and construction giant Sany Heavy Industry Co Ltd revived their listing plans buoyed by the jump in the benchmark Hang Seng index this year.

The IPO pipeline in Hong Kong could reach nearly $8.4 billion in the first half of 2012, according to figures from Thomson Reuters publication IFR, if demand for new issuance improves.

But that is a big “if” at this stage.

“Sentiment is good, but as we all know, valuations for shares that are already listed in the mainboard are still attractive to investors,” said Patrick Yiu, a director at Cash Asset Management in Hong Kong, who is a regular investor in new offerings. “I haven’t put my focus on IPOs at this moment yet.”

Hong Kong-listed companies trade at a price-to-earnings ratio of about 9.8, among the lowest valuations in Asia-Pacific and down from 14.6 a year earlier, according to Thomson Reuters data. By comparison, shares in the Philippines main stock index trade at a regional high of 16.4 times and in India at 16 times.

A slow start to IPOs comes despite a good ride enjoyed by the limited number of companies that went public this year. Six of the eight offers are trading above the IPO price, with air freight company ASR Holdings and construction company Vision Fame both up about 88 percent since their debuts in mid-January.

Admittedly, the deals this year have been small with the eight offers in total raising just HK$1.58 billion, the lowest volume since 2009 when HK$1.42 billion of deals were done through mid-February. Still, a strong performance hasn’t inspired the bigger offers to get off the block.

“The IPO market is still very difficult. The mood is not at all reflected in the secondary performance this year,” added the ECM head. “Investors are very skeptical towards deals still.” (Editing by Michael Flaherty and Muralikumar Anantharaman)

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