Deluge of tiny IPOs keeps HK equity market ticking

Initial public offerings are picking up. But the world's second-largest venue for floats finds itself awash with small fund-raising plans

It has been awhile since Hong Kong IPO market was this busy. Starting in mid-June, Champagne and roast suckling pigs were served almost every day in the Exchange Square in Central. Bankers, lawyers and board-room directors all toasted one another to fete the new issuances - often several at a time.

Yet among the celebrations could be heard the often-repeated question: "Why is the new stock trading at only one dollar?"

Approaching the year's second half, Hong Kong's equity market experienced an explosive round of initial public offerings. Compared with the first five months, when only 23 new listings were posted on the main board, a total of 34 companies had debuted from June to Tuesday.

Simultaneously, another three companies are on the waiting list, boosting the number of offerings to 37 from June till now.

In comparison, May and April saw only three and two IPOs, respectively. In June last year, only five companies listed.

Yet to the surprise of seasoned investors in Hong Kong, the world's second-largest IPO destination by number of listings in 2013, the scale of floats is getting ever smaller. Of the 37 enterprises issuing shares, about 22 looked to raise less than HK$1 billion ($129 million). Only two companies, Tianhe Chemicals Group Ltd and Luye Pharma Group Ltd, sought more than HK$5 billion. Mega IPOs, such as WH Group's postponed HK$10 billion offering in April, may never emerge again.

As a result, the 34 newly listed companies in the June rush raised HK$42.61 billion in total, or HK$1.2 billion apiece on average.

Volatility is said to be the reason.

"Traditionally, April and May are a major window for IPOs," said DaiQiang, managing director of Asia investment banking and capital markets of Jefferies Hong Kong Ltd. "However, this year in the second quarter, market sentiment was not ideal for large-scale floats."

The Hang Seng Index, after peaking at 24,038.55 points in December, was on a roller-coaster ride in the first half, fluctuating between 21,200 and 23,200 points recently.

At the same time, although Alibaba Group Holding Ltd abandoned Hong Kong for New York in March, it still shadows IPO activities on the other side of the globe. "Such a high-profile debut is certainly eye-catching for all global investors. No other big issuance would want to overlap its schedule and compete for the limelight," Dai said.

After filing its prospectus with the US Securities and Exchange Commission in May, the e-commerce giant is expected to stage the grandest offering ever seen and raise some $20 billion.

"But for companies eyeing less ambitious goals in the Hong Kong equity market, there's still a chance," Dai said. "It's worth trying."

And a vast number of entrepreneurs are champing at the bit for the opportunity. As structural reform unfolds on the Chinese mainland, more sectors are being opened to private enterprises, which are often small or medium-sized companies.

"Chinese SMEs are eager to expand. They are crying out for funds," said Edward Au, co-leader of national public offering group of Deloitte Touche Tohmatsu Ltd. "However, at this stage, the capital market on the mainland can hardly provide an instant solution. That squeezes them overseas, where Hong Kong is obviously the first choice."

Resuming IPO activities in the A-share market this year, the China Securities Regulatory Commission said in May that it would green light about 100 companies seeking listings in the second half of 2014. But, according to a statement the commission released on July 1, as many as 637 applications are piling up.

"As concerns about a hard landing in China ease, and low interest rates globally are expected to remain, investor confidence is picking up in Hong Kong, a market under the influence of both the China and US economy," Au said.

On June 18, the US Federal Reserve decided to keep the federal funds rate under 0.25 percent "for a considerable time" after tapering terminates, which is estimated to occur at year's end. The move is expected to help maintain global liquidity. Separately, the latest HSBC Holdings Plc's China Purchasing Managers Index also stood at 50.7 on July 1-returning to expansion territory for the first time this year. The PMI of the National Bureau of Statistics has climbed for a fourth consecutive month, reaching 51-a half-year high.

But the latest influx of small-cap IPOs is not worry-free. "Such an outburst of new floats will lead to considerable dilution," said Paul Chan, Asia (excluding Japan) chief investment officer of Invesco Hong Kong Ltd.

"So many new stocks could drag overall performance of the market if the return is not there to support them. It would be fine in a high-growth period. But revenue doesn't grow as fast now as it used to, and profits increase at an even slower pace.

"And it would be fine if companies were buying back stocks the way they do in the US and Japan. But that culture is nonexistent in emerging markets such as Hong Kong," Chan said.

"It would also be fine if we were celebrating record highs like India is, but the Hang Seng Index has lingered at around only 22,000 this year.

"Institutional investors are selective," Chan said. "Not all issuances will be successful."

Peter So, co-head of research at CCB International Securities Ltd, said: "As the market atmosphere improves, investors are seeking higher returns. Sectors such as technology, 'green' lifestyles and the pharmaceutical industry are likely to be favored as they are policy-supported. As long as the new companies are on track to deliver returns, they are going to be welcomed in Hong Kong."

Au said: "China is transforming. The private sector will become the growth engine. In the new era, the Hong Kong IPO market is likely to see dominance of mainland SMEs for at least the next two years. It's natural to see new stocks' average market value and capital raised cutting back."

"For the second half, the pipeline is strong," he said, adding that Hong Kong is eyeing more than 50 new offerings before year's end.