State of the HK IPO Market

Posted on March 18, 2012 at 6:03 PM


In the past few years, the Hong Kong Stock Exchange has emerged as a global IPO leader, dominating the market for several years consecutively. The scaled back pricing of a few large IPOs and investor nervousness have done little to seriously alter the financial world’s shift to the Asian market. Likewise, the reclamation by the United States of the number one position in the IPO market has not dampened foreign companies’ appetite for listing in Asia. This interest is hardly one-sided, as Chinese companies are also increasingly attempting to list on American exchanges.

As for Hong Kong IPOs, Canadian based Sunshine Oilsands came to market with the biggest IPO in Hong Kong since the $1.9 billion New China Life Insurance Co Ltd (1336.HK) dual listing in the city and Shanghai in December 2011. It was also one of the biggest offerings in the world so far in 2012, as new listings from Europe, the United States, and Asia lag the mega offerings seen in 2011.  Though it has recently endured a loss, many believe that it will rise again as Sunshine teams up with various energy companies and, most importantly, the Bank of China.

A Hong Kong based team from Freshfields advised Sunshine Oilsands on Hong Kong law as it applies to their IPO. China Chairman Teresa Ko and China Corporate Head Ken Martin led the team. Advising Sunshine Oilsands on Canadian law aspects of their IPO is McCarthy Tétrault with a team led by Rick Pawluk and Greg Turnbull. The underwriters were advised on U.S. law aspects by the Hong Kong based Skadden team led by partner Alec Tracy, and on Hong Kong law aspects by Kirkland & Ellis capital markets partners Dominic Tsun and Li-Chien Wong.

Ten companies have gone public in Hong Kong this quarter, mostly smaller deals that raised a combined HK$3.3 billion ($425.49 million). 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.

Another issuer not from the mainland and following on the heals of several major consumer and luxury brands such as Prada, that went public on the exchange last year, Graff Diamonds recently filed its application to list on the Hong Kong exchange and it’s anticipated that the listing will occur early this summer.  Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank will handle the public offering.  As the market has shown, high-end retailers in particular are focused on Hong Kong as the entry point into what McKinsey calls “the future of the luxury goods market.”

The strategy behind Chinese debuts stems from the fact that issuers take advantage of an investor base flush with cash, while also promoting their brand in a coveted market. Samsonite’s CEO, Tim Parker, spoke about this trend when he explained that his intention was to, “orient the company where the world’s center of gravity is going to be in the future.” As a Managing Director at Morgan Stanley’s global capital markets group in Hong Kong explains, it’s natural for many Western companies to list in Hong Kong when they make 30-40% of their revenue in China.

In terms of outbound investment on the US stock exchanges, many US and UK law firms offer diversified platforms because their clients include foreign companies listing on the Asian exchanges and Asian companies listing on the U.S. exchanges. One continuing market trend is the controversial reverse merger/takeover, or RTO, whereby a defunct but still publicly traded Shell Company in the U.S. is taken over by a Chinese operating company. The Chinese company then is able to list on a U.S. exchange without expending the funds and time that an IPO would have cost. The process is said to invite fraud because smaller Chinese companies, that can’t meet their own domestic exchanges’ profitability requirements, capitalize on general investor excitement over Chinese stocks. Some have been guilty of overstating their revenues to investors with a decreased ability to discern the truth and a decreased chance of reaching the company’s assets in China in case of liability.

In Hong Kong, these types of scandals are rare because these “backdoor listings” on the US stock exchanges are treated as new IPOs on the HKSE, as the Financial Times has noted. Approximately 350 Chinese companies are currently listed in the U.S. through reverse mergers. Reuters reports that the SEC is developing new policies to deal with these accounting scandals, including possible trading suspensions. Chinese regulators have been cooperating with the American regulators to perform inspections of these companies abroad and the trend does appear to be slowing down significantly. Also aiding the RTO slowdown, are the SME Board and the ChiNext Board of the Shenzhen Stock Exchange, which opened in 2004 and 2009, respectively. These two boards were established to provide public funding options for smaller-growth and emerging Chinese companies and are home to approximately 800 listed companies.

Meanwhile, the performance of legitimate Chinese companies listing in the U.S. has declined somewhat recently, in part because of investor nervousness over these RTO accounting scandals. There’s also a tendency among buyers to get overexcited by Chinese stocks and then sell quickly when the stock doesn’t immediately perform. Social networking site Renren, NetQin Mobile, and Phoenix New Media were all victims to this quick pop and fizz phenomenon, rising an average of 21% on the first day of trading and then falling to 4% above the offering price a month later.

The bilateral interchange taking place between Chinese companies debuting in Western exchanges and Western companies debuting in China has been termed a “love affair” but the more appropriate analogy seems to be a marriage. There is a serious commitment on both sides to keep interests intertwined and avenues open for future communication. The field is an exciting one for those that are eager to aid in building this relationship and work on both US and Chinese exchanges.

This growth is reflected in the expanding employment opportunities for capital markets attorneys in Asia with US, HK, or increasingly onshore IPO experience. Firms are seeking not just experienced partners and senior associates, but also junior associates in anticipation of continued development in their capital markets practices. Please feel free to contact us should you have any questions at (212) 979-5900 or dawn@cypressrecruiting.com. You can also visit our website at www.cypressrecruiting.com or asialegalblog.com to obtain more job and market information.

 

 


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