Chinese IPOs

BACK in May, the biggest problem for bankers, lawyers and accountants in Hong Kong was finding enough people to handle a deluge of initial public offerings (IPOs). Come July and the mood has abruptly changed. 

Officially only seven IPOs have been abandoned this year, meaning that a prospectus has been issued and withdrawn. But plenty more have been shelved at an earlier stage on worries about China’s slowing economy (which were reinforced by another interest-rate rise this week).

The bullish view is that any pause in the IPO frenzy will be short-lived. PwC, a consultancy, this week forecast that the second half of 2011 would be even more active than the first. It expects a total of 110 IPOs for the year in Hong Kong (after 48 in the first six months) and almost triple that number on the mainland, in Shenzhen and Shanghai. Edmond Chan, a PwC partner, points out that the first-half boom came in spite of Japan’s earthquake, the Arab spring and crisis in Greece.

During the second half of the year, Mr Chan predicts, at least one large Chinese bank, two securities companies, one insurance company and a few (very large) construction companies will probably list in Hong Kong, along with a host of retail and consumer-goods companies. The size of the listings on all three Chinese markets has, on average, been declining (see chart), as smaller private companies supplant state enterprises, but there is no fall in the appetite to go public. And along with Asian companies, says Mr Chan, there is clear evidence that Hong Kong has become a focal point for the listing of companies from around the world.

There is another perspective. Yes, foreign companies have been listing in Hong Kong and for several years there have been expectations of foreign listings in Shanghai, but the process has not been smooth. Prada, an Italian luxury-goods firm, and Glencore, a Swiss commodities trader, both recently listed in Hong Kong: the offerings were a slog and went off at low prices. In the aftermarket Prada has traded up, a bit; Glencore down, a bit.

All of this is in sharp contrast to 2006 and 2007 when the number of IPOs on the various Chinese exchanges began to accelerate. Early on, the gains were staggering, creating huge demand for whatever might be offered next. But over the past two years PwC reckons 30-40% of listing firms soon traded below their offering prices.

That means the markets are changing. Questions are being asked about how debuting companies are structured, about their accounts and about the overall growth story in China. More information is being demanded, something many Asian firms are still reluctant to provide. Mr Chan says future deals will be done in droves but he concedes they are likely to command lower valuations. Even the optimistic take has become a little less rosy.