By Prudence Ho
Hong Kong is one of the world's top venues for initial public
offerings, thanks to listings by Chinese companies over the years,
but most of the IPOs have been a losing bet for investors, with the
bulk of them lagging behind the market in recent years.
Investors who bought into IPOs in the city--the world's top
venue for listings between 2009 and 2011--did especially badly last
year. Of the IPOs that raised more than US$300 million, 85%
performed worse than the benchmark index in the first year after
they listed, data from S&P Capital IQ show. This year, with
Hong Kong in fourth place in global IPO rankings, 67% of IPOs have
underperformed in the first 12 months. The Hang Seng Index, the
city's benchmark, is up 2.9% this year, following a 2.9% gain in
2013.
"I would rather buy companies after they have listed in Hong
Kong and wait for a better entry point," said Andy Mantel, a
founder and chief executive of fund house Pacific Sun Advisors.
"There are so many listed stocks [from China] so there is less of a
novelty factor--why buy an aggressively priced IPO when you can buy
similar listed companies that are much cheaper."
Not only did so many companies underperform, 77% of the IPOs in
2013 and 75% this year have lost money for investors.
Dairy companies such as YuanShengTai Dairy Farm, which is down
65% in the 12 months since its 2013 listing, and China Huishan
Dairy Holdings Co., which dropped 33% in its first 12 months,
showed once again that Hong Kong IPOs, while among the
most-lucrative businesses for investment banks, are bad bets for
investors.
Credit Suisse Group and Macquarie Group were lead banks for
YuanShengTai's IPO, while Deutsche Bank Group, Goldman Sachs Group
Inc., HSBC Holdings PLC and UBS AG led Huishan's IPO.
The large number of flagging IPOs are a far cry from the early
days of Hong Kong listings by Chinese companies, when Beijing was
embarking on privatizing its giant state-owned firms and foreign
investors clamored for a piece of China's then high-growth
companies. In 2005, for instance, when many big Chinese firms were
listing in Hong Kong and deals of 50-times oversubscription weren't
uncommon, just 12% of IPOs underperformed the index.
"The slowdown of China's economic growth in recent years has
made investors much more selective. They prefer companies that are
direct beneficiaries of China's policies," said David Suen, head of
equity capital markets for Asia, excluding Japan, at J.P. Morgan
Chase & Co. in Hong Kong.
Gross domestic product is rising around 7% on an annual basis,
compared with 14.2 % in 2007.
Many fund managers have pointed to health-care and clean-energy
companies as being in sectors that could benefit from Beijing's
push to bring down pollution or cater to the country's aging
population.
Illustrating how the drivers of China's economy have changed,
the banks and commodity companies that reigned when they listed a
decade ago are now the least-loved of China plays.
China Coal Energy Co., one of the country's top miners, rose
458% in the 12 months after it listed in Hong Kong in 2006. Copper
miner Chinalco Mining Corp. International, in contrast, fell 53%
after its IPO in January 2013. China Coal is up just 20% now from
its IPO price.
"Most sectors in China have suffered from overcapacity or are
listing when their days of high growth have ended. These companies
won't be able to deliver expected results to investors and share
prices drop soon after listing," said Alex Au, managing director of
Alphalex Capital Management.
Industrial & Commercial Bank of China Ltd., raised US$21.9
billion in 2006 in a Shanghai-Hong Kong listing that was then the
world's largest. The clamor for its shares led to a nearly 75 times
oversubscription and the price rose 134% in the year after its IPO.
This year's biggest Hong Kong IPO--the US$3.1 billion listing in
January by billionaire Li Ka-shing of his electric assets in the
city--was around six times oversubscribed.
With China's economy growing at its slowest in five years and
bad debt weighing on many Chinese bank stocks, appetite for recent
bank IPOs out of China has been the reverse, even when priced much
lower. Harbin Bank, which raised US$1.1 billion in March, priced
its IPO at 0.86 times book, and is down 7% since its listing.
Admittedly, it is a smaller bank than ICBC, whose shares are
trading 71% above the IPO price, but China's biggest bank managed
to get listed at a now-unheard of 2.2 times book in 2006. It is now
trading at 0.98 times book, according to S&P Capital IQ.
Since the 2008 financial crisis, investors have shied away from
risk, a point illustrated by bankers' recent push to attract
committed investors that don't sell on day one of a listing.
In 2005, the tranche of cornerstone investors on an average IPO
were just 14% of the deal; by 2013, the worst year for IPO
performance, cornerstone investors made up 27%, Dealogic data show.
A $3.2 billion IPO of Chinese nuclear firm CGN Power Co. in the
works in Hong Kong has sold 42% of the deal to cornerstone
investors, who pledge to hold their shares for at least six months
after listing.
The types of cornerstone investors on Hong Kong IPOs have also
shifted from the tycoons or institutional investors that were more
common in the mid-2000s to "friends and family" investors or state
firms supporting state listings. Some deals, such as the US$2.4
billion of Chinese pork producer WH Group, which bought Smithfield
Foods last year, cut its IPO from around $5 billion after failing
to attract cornerstone investors.
"People were much more enthusiastic about being a cornerstone
investor of an IPO in those years in 2006 to 2008, as the macro
backdrop suggested that the majority of Chinese companies would
benefit from China's fast-growing economy," Mr. Suen said.
Where there have been winners for IPO investors in Hong Kong, it
has often been in the stocks that benefit from China's growing
middle class, or the country's moves to improve health care.
One of those sectors has been the rapidly growing pharmaceutical
industry. Luye Pharma Group, whose products include cancer and
cardiovascular drugs, saw its shares soar 80% through Wednesday
after it went public in July. But in a market where so many new
listings have underperformed, stocks like Luye remain rare bright
spots.
Still, companies are lining up to take advantage of rising stock
prices.
BAIC Motor Corp., a Chinese car maker partly owned by Daimler
AG, is planning to start gauging investors' interest next week in
an initial public offering that could raise in between US$1.2
billion and US$1.5 billion in Hong Kong, a person familiar with the
situation said Friday.
The company plans to list in Hong Kong on Dec. 18, the person
said, but the timetable is preliminary and subject to market
conditions.
The company couldn't be reached for comment.
Write to Prudence Ho at prudence.ho@wsj.com
Access Investor Kit for Luye Pharma Group Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=BMG570071099
Access Investor Kit for Industrial & Commercial Bank of
China Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=CNE000001P37
Access Investor Kit for Aluminum Corp. of China Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=CNE1000000T0
Access Investor Kit for Aluminum Corp. of China Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=CNE1000001T8
Access Investor Kit for Industrial & Commercial Bank of
China Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=CNE1000003G1
Access Investor Kit for Aluminum Corp. of China Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0222761092
Access Investor Kit for Industrial & Commercial Bank of
China Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US4558071076
Access Investor Kit for McGraw Hill Financial, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US5806451093
Subscribe to WSJ: http://online.wsj.com?mod=djnwires