Bloomberg News

Hong Kong IPOs Prove Less Lucrative as Chinese Banks Take Share

December 11, 2011

Dec. 9 (Bloomberg) -- Hong Kong’s market for initial public offerings is becoming less profitable for investment banks as a record number of underwriters vie for fees.

IPOs that raised at least $500 million counted an average of 5.3 advisers this year, compared with 3.1 in the past decade, and the most since Bloomberg began tracking the data in 1999. That’s exacerbating a slump in sales that compressed total fees in the city to $456 million, less than a third of those in China or New York, according to researcher Freeman & Co.

Competition is increasing as Chinese securities firms, such as China International Capital Corp., take more business from Wall Street rivals, with their share of the market surging to a five-year high as more mainland companies pursue Hong Kong IPOs, data compiled by Bloomberg show. Companies are also enlisting more underwriters to ensure deals get done as markets fluctuate.

“Hong Kong’s IPO underwriting market is getting very crowded,” said Arif Khurshed, a senior lecturer at the Manchester Business School who studies IPOs in Asia and Europe. “Competition from Chinese securities firms is squeezing fees.”

Underwriters in Hong Kong are getting an average commission of 2.2 percent of an IPO’s proceeds, compared with 3.5 percent a decade ago, Bloomberg data show. By comparison, the average fee for managing a U.S. initial offering is about 5.5 percent.

New China Life

Chinese banks captured a combined 30 percent of the Hong Kong IPO market this year, the most since 2006, Bloomberg data show. Beijing-based CICC, which helped manage New China Life Insurance Co.’s $1.9 billion IPO in Hong Kong and Shanghai this week, is in third place, while Bank of China Ltd. ranks sixth and China Construction Bank Corp. is ninth, the data show.

Of the 66 companies that went public in Hong Kong this year, 36 were based in China, compared with 26 from Hong Kong and four from other regions, Bloomberg data show. Chinese companies accounted for six of the top 10 initial sales, including the $1.2 billion offering of shares in Sun Art Retail Group Ltd., the biggest hypermarket operator in China, and the IPO of billionaire Li Ka-shing’s Hui Xian Real Estate Investment Trust, Hong Kong’s first stock sale denominated in yuan.

Chinese investment banks “saw opportunities as global banks weakened in the crisis while they did well in China’s domestic capital market, so they became ambitious about going beyond the boundary,” said Fang Fang, chief executive officer in China for New York-based JPMorgan Chase & Co., which ranks 11th so far this year in Hong Kong initial public offerings.

Chinese Ambition

The firms, however, are missing out on some of Hong Kong’s largest sales, including Chow Tai Fook Jewellery Group Ltd.’s IPO, which will raise about $2 billion after pricing today, according to two people with knowledge of the deal. JPMorgan is among seven underwriters on the sale, which lists no Chinese banks.

On top of rising competition, volatile stock markets are contributing to pressure on fees, said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, which oversees $2.5 billion. The Hang Seng Index fell as much as 33 percent from its 2011 high in January and is down 17 percent so far this year.

“In a challenging market like this, companies are trying to get as many underwriters as possible to optimize distribution and reduce risk,” said Schuster, whose firm invests in IPOs globally, including Hong Kong offerings. “It’s not like two years ago when IPOs were just flying off the shelf.”

Fewer Deals

PCCW Ltd., Hong Kong’s largest phone carrier, hired eight banks to manage the $1.2 billion IPO of some of its telecom assets in November, while Sun Art used seven underwriters, including Citigroup Inc., HSBC Holdings Plc and UBS AG, for its July stock sale. New China Life has enlisted eight banks for the Hong Kong portion of its debut.

By comparison, Chinese retailer Belle International Holdings Ltd. completed a $1.3 billion IPO four years ago with just two underwriters.

Initial stock sales in Hong Kong have raised $17.7 billion this year, the lowest amount since 2008, Bloomberg data show. IPOs in the city raised $52 billion last year. At $456 million, fees in the year through Dec. 5 are half the annual average for the past five years, when Hong Kong generated $4.5 billion in total IPO fees, behind New York and China, Freeman data show.

‘Massive Opportunities’

While Hong Kong offerings are likely to rebound, increased competition will remain as more Chinese banks seek to make inroads in Hong Kong. Guosen Securities Co. and Haitong International Securities Group Ltd., two of the 10 biggest IPO underwriters in China, are expanding investment-banking divisions in Hong Kong.

Guosen, based in Shenzhen, doubled headcount at its Hong Kong operations to about 200 this year and is eying “massive opportunities” outside China, CEO Lu Xiao Ning said in July. Haitong Securities CEO Lin Yong said in April his firm would “pay what’s needed” to lure talent as part of a plan to increase its investment-banking team by 50 percent this year.

CICC led the $1.3 billion Hong Kong part of New China Life’s IPO. The Chinese bank is acting as joint global coordinator with UBS and Goldman Sachs Group Inc. China Merchants Securities (HK) Co. is also on the deal. China’s CMB International Ltd. is a joint bookrunner on the IPO of Baoxin Auto Group Ltd. Morgan Stanley and JPMorgan led the deal.

“It is no longer as profitable as several years ago, when Goldman Sachs et al were able to corner the big IPOs,” said Francis Lun, managing director at Lyncean Holdings Ltd., a Hong Kong-based brokerage.

--With assistance from Mark Lee in Hong Kong. Editors: Philip Lagerkranser, Katherine Snyder

To contact the reporters on this story: Fox Hu in Hong Kong at fhu7@bloomberg.net; Zijing Wu in London at zwu17@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net; Jacqueline Simmons at jackiem@bloomberg.net


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