IPO mountain too hefty for Hong Kong

May 25, 2011

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

HONG KONG — Hong Kong is turning into a buyer’s market for new stock offers. Companies are queuing up to issue some $54 billion through initial public offerings, according to Thomson Reuters data. That’s $1 billion more than 2010, a record year. The chances of all this stock getting sold are shrinking fast.

Leading the charge are consumer brands like Prada and Samsonite, plus casino operator MGM China and Hong Kong-based jeweller Chow Tai Fook. These four may raise over $8 billion, exploiting the high valuations Hong Kong affords consumer-related stocks: the MSCI China index shows retailers trading at almost a 20 percent premium to their 100-month average on a forward price-to-earnings basis.

But it’s not all glitz and glamour. Guangdong Development Bank, part-owned by Citi, and financial conglomerate Citic Group could add a further $13 billion. And don’t forget Industrials like the Beijing-Shanghai high-speed rail operator gunning for an estimated $5 billion.

Now factor in competition from secondary offerings. Several Chinese banks may need fresh equity to meet tough capital standards — among them Minsheng and China Merchants Bank. Necessity brings them to market at a time when valuations for mainland banks listed in Hong Kong are a third below their historical average. A glut of new stock, estimated by Credit Suisse at $16 billion, may push valuations even lower.

This level of stock issuance arguably needs a bull market with legs to get sold. That is not the situation today. Almost $300 million was pulled from China-focused funds in the past week, according to Citi. Hong Kong’s benchmark index is down 6.5 percent from April’s highs. The imminent end to U.S. quantitative easing, which has propped up asset prices across Asia, will remove one leg of support. More data showing China is slowing but still harbouring inflation could remove another.

Investors have the upper hand. Issuers will have to accept modest valuations or pass. The latter option will be easiest for consumer goods makers, whose capital raisings are as discretionary as their products. A megabrand like Prada — now on its fifth attempted IPO — could squeak through, but for others, Hong Kong’s allure may have peaked.

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