Joined: 17 Jul 2006
|Posted: Mon Oct 02, 2006 5:44 am Post subject: Chinese IPOs - Another Reason to Learn Mandarin
|Chinese Initial Public Offerings: Another Reason to Learn Mandarin Chinese
Read an article from the Economist
IT IS a toss-up which is the more extraordinary: the supply of public offerings coming from China, or the demand for them. China Merchants Bank, a second-tier lender valued at $17 billion (large, but in Chinese terms not very large), will begin trading on the Hong Kong Stock Exchange on September 22nd after issuing $2.4 billion in shares. The portion reserved for institutional investors was at least 35 times over-subscribed: the retail slice was 266 times over-subscribed. Almost no one is getting as many shares as they want; many are getting none at all.
And China Merchants is hardly the hottest deal. Beijing Jingkelong, a small but fast-growing store operator, sold $76m-worth of shares in an offering in which demand outstripped supply by 540 times. The pricing period for China BlueChemical, a former fertiliser subsidiary of China National Offshore Oil Corporation that is coming to market, has been shortened because of overwhelming interest—it is more than 100 times over-subscribed, and rising. Shui On Land, a large property developer particularly active in Shanghai, has begun promoting a listing; already it is fully subscribed.
Any number of other sales are percolating upwards, including Lee Kee Holdings, a zinc trader, LK Machinery, a die-casting firm, and China National Coal. All of them pale before the upcoming offering of Industrial and Commercial Bank of China (ICBC), the country's largest bank. This is likely to set a new record, with about $20 billion-worth of shares sold. The bank's total value will exceed $100 billion.
Among other notable aspects of this offering is that, had it been done only a few months ago, the shares might have been offered exclusively in Hong Kong. That was the case when Bank of China, the country's second-largest bank, offered $11 billion of shares in June, and when the fourth-largest lender, China Construction Bank, issued $9 billion last autumn. Since then, changes in government regulation and a successful secondary offering by Bank of China in Shanghai have encouraged more listings on the mainland.
Not long ago the size of the ICBC offering would also have been about 40% smaller, bankers say. Such is the appetite in both the Hong Kong and mainland Chinese markets that discussions now revolve around how much larger, not smaller, the listing can be. And whatever is visible is just the tip of the iceberg. Chinese deals often have a long gestation period. One investment bank says it is already considering offerings that may occur in 2008.
At the moment there may be no more exciting markets in the world than those in Hong Kong, Shanghai and Shenzhen. In a year when stock exchanges around the world are listless, share prices in Hong Kong are up by 17%. In mainland China, they have risen by even more. Comfortingly, profitability is rising even faster than share prices. After a nasty bear market, prices are now close to their 2000 peaks.
Having shaken off a sense of gloom, Hong Kong's retail investors now seem to have forgotten things can ever go wrong. They believe the Chinese government is bound to price the deals so share values rise afterwards, in as much as a flop would undermine future privatisations. That may be too optimistic; if the companies were sold too cheaply, the government would be accused of a giveaway. Still, the consensus is that shares in a newly offered company will tick up by 10-15%.
Local banks appear to share the confidence, extending margin loans for up to 90% of the initial share price. Allocations may be tiny, but the return on investment can be huge. Large blocks are reserved for Hong Kong tycoons, who in return agree not to flip their shares. Occasionally there are complaints of favouritism. But at least it is clear where the smart money is going.
Bankers wanted, Mandarin useful
The extraordinary pace of deals should continue for a bit longer but the nature of the offerings will soon change, if only because the largest companies, such as the state-owned banks, will have been sold. Some predict that the value of public offerings could drop by one-third next year. That, of course, would still leave plenty of business, which is why investment banks continue to hire at a frenetic pace. It has never been a better time to be able to read Mandarin and a financial statement.
But with the completion of the ICBC offering, probably in November, a different type of state-owned asset will come up for auction. Companies in all sorts of industries will be on offer—metals and mining, coal, rail, steel and ports—as well as smaller banks (though by any ordinary standard, not that small).
As the type of companies changes, the offerings themselves are likely to receive more scrutiny. In listing a state-owned business, raising money may be less important than increased transparency, demands for better corporate governance, and an emphasis on efficiency. With the smaller, private deals (see chart), there will be more pressure to justify how the money they raise will be spent than there has been with privatisations. For some firms, publicly traded shares will provide a currency for consolidating some of China's wildly fragmented industries.
For all the excitement, the offerings are, in a sense, incomplete. Most of the companies, public and private, sell only about 10-25% of their shares, so those who buy will be minority shareholders with fairly weak claims. Listing will inevitably shed light on operations: pesky investors may make some noise. But a truly capitalistic market driven by purely profit-driven investors—who take over laggards and toss out managers—is still far away.