Global Economics

A Mix for New Hong Kong Listings


Of three new IPOs trading recently, Sinoma was up 35%, BYD Electronic was up slightly, and a Vietnamese motorbike maker fell below its opening price

The trading debut yesterday of the last three sizeable Hong Kong initial public offerings this year offered further proof of how investors have become selective in recent weeks. While China National Materials Company, also known as Sinoma, and BYD Electronic (International) held their ground on the first day of trading, Vietnam Manufacturing and Export Processing (VMEP) fell below its issue price.

The three companies will bring the total amount of IPO funds raised in Hong Kong this year to $277 billion ($36 billion), which is down 16.6% from 2006 when the giant offerings by Industrial and Commercial Bank of China and bank of China inflated the numbers.

In many ways, yesterday's first-day performances were in line with the demand shown for these three companies during the IPO with Sinoma being the unrivalled investor favourite. Having seen the institutional portion of its $538 million offering 165 times covered and the retail portion 283 times covered, China's largest cement manufacturer gained 34.9% yesterday as institutional investors tried to add to their small allocations.

The strong demand for the IPO, which was arranged by BOC International and UBS, allowed Sinoma to fix the price at the top of the range and some observers said they had thought that this might hamper the performance in the secondary market.

"To my surprise, Sinoma performed very well on its debut. With reference to some syndicate reports, its valuation is not cheap," says one analyst.

This didn't seem to worry most investors, however. The share price surged more than 40% above the $4.50 IPO price shortly after opening, but the gains were quickly trimmed down to around HK$6. Continued buying saw it edge gradually higher again during the morning session, but in the afternoon it returned to the HK$6 level, finally closing at HK$6.07. More than 580 million shares changed hands during the session, or about 62% of the shares sold during the IPO.

One trader compared the cement maker to the recent H-share listing of China Railway Group, which is the only other Hong Kong IPO this month to have recorded substantial gains on the first day. At $2.48 billion, China Railway's H-share IPO was much larger than Sinoma's offering, but it had good help from the strong rally in its A-shares, which started trading four days before the H-shares, and finished up 27% on its first day of Hong Kong trading on December 7.

Having witnessed China Railway's strong performance, many investors likely felt that Sinoma ought to be a winner as well, given that both companies are exposed to the same booming construction industry. China Railway is the largest construction company in China and the third largest in the world, with a particular focus on transportation infrastructure and municipal works projects.

The strong debut is good news for the pipeline of listing candidates that are looking to launch their offers early in the new year, as it shows investors are still interested in buying companies that they perceive to have good growth prospects.

BYD also closed above its IPO price, although the gains were much less impressive than for Sinoma and trading was thin. However, at $758 million, BYD's offering was 40% bigger than Sinoma's.

The manufacturer of mobile handset casings and keypads, which is a spin-off from Hong Kong-listed battery maker BYD Group, opened below its issue price of HK$10.75 but bounced to an intraday high of HK$11.28 shortly thereafter and held above par for the rest of the day. It closed at HK$11, representing a 2.3% gain on the day. Only 31.4 million shares were traded, which gives a turnover of no more than HK$340 million ($44 million) and equals less than 6% of the shares sold during the IPO.

The thin trading seems to back up earlier claims from the bookrunner that the quality of the order book was very high despite the modest interest overall. The fact that the stock held above the issue price also suggests that UBS, as the sole bookrunner, got the pricing right. However, market watchers say BYD's price performance also suggests that the bookrunner was actively stabilising the stock on the first day by buying back part of the greenshoe.

"In my opinion, it shows that UBS had the 'sincerity' to hold the price above the ground," says a dealer who watched the stock closely during the day.

When the offering closed on December 12, BYD's institutional portion, which made up 81.1% of the total deal, was more than three times covered, while the 10% retail tranche was less than half covered. Given that retail investors often sell down their shares of newly listed companies a day or two after the trading debut, the fact that such a small portion of the deal went to retail investors is likely to have limited the selling pressure.

Yesterday's third debutante, VMEP, could not escape the fate of trading below its issue price, however, and the Vietnamese manufacturer of scooters and cub motorbikes ended up following the same downward path as many other newcomers this month. The stock struggled to get near its HK$3.75 issue price shortly after opening, but it was in vain. The stock traded around HK$3.30 to HK$3.40 for most of the day, but started to fall again half an hour before the market close and finished at HK$3.12 - 16.8% below the issue price. Turnover was slightly more active than for BYD with 45.3 million shares changing hands, representing 20% of the pre-listing share issue.

VMEP raised $109 million from its IPO, which was led by BNP Paribas and priced at the bottom of the offering range. Its retail and institutional offers were both fully covered, but the retail demand wasn't strong enough to trigger a clawback.

Despite the fact that it is almost Christmas, there are still three more new listings for the market to absorb this year, although all three of them are quite small. Eyang Holdings (Group) and Pan Asia Environmental Protection Group will both start trading today after raising $17 million and $72 million, respectively, and will be followed on December 27 by Xingye Copper International Group.

The latter priced its offering at HK$1.70 per share, which marked the low end of the indicative range and allowed it to raise $32.7 million. BOCI was the sole bookrunner.

Eyang makes so called MLCC capacitators - electronic components used in IT, communication and consumer electronic products - and mobile phones. It is being brought to market by CAF Securities. Pan Asia Environmental is principally engaged in the sale of pipes, water treatment and flue gas treatment products and equipment, and the construction of environmental protection engineering projects. Its IPO was arranged by Taifook Securities.


Steve Ballmer, Power Forward
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