Pulled Chinese IPO sign of troubled times

May 6, 2010

Has Chinese tightening claimed a scalp? Swire Pacific, one of Hong Kong’s oldest conglomerates, pulled the $3 billion listing of its property business on Thursday, one day before it was due to price. That is a clear vote of no confidence in something – and probably in a few things.

To start, the pricing of Swire Properties looked rich when the initial public offering was launched in April. Before factoring in new money raised, the midpoint of the range represented around a 10 percent discount to its estimated net asset value for 2010 – less than half that of some peers. Its pitch was a push into the Chinese mainland, where it has little experience. It’s hard not to conclude that the company just got a little greedy.

Still, a collection of patchy measures from Beijing is also a significant factor. The Chinese government is determined to quell rapid property price increases, so has raised minimum down-payments and restricted mortgage lending. Investors aren’t convinced, but markets are likely to remain in limbo as long Beijing shies away from the interest rate hike that is more likely to work. The stocks of Swire’s Hong Kong peers have fallen as much as 9 percent in two weeks.

Then there is the Greece effect. Not that there is much risk of China or other Asian sovereigns getting into trouble over their debts. Even traditional weak links like Indonesia and the Philippines have now brought their external borrowings under control. But a flight to safety may take money out of Asia. Property and IPO stocks are likely to be top of the unsafe list.

There is still confidence in some parts of the Chinese IPO market. Cosmetics maker L’Occitane’s $700 million IPO showed boom-time exuberance – the retail portion was oversubscribed by 160 times. And Swire might have got a warmer reception if it had aimed a little lower. But fearful investors are clearly cooling on the riskier new issues – and with volatility like Thursday’s in U.S. markets not far from the surface, it’s hard to blame them.

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