A capital markets expert discusses international equities
Hong Kong, June 1997: Beijing Yanhua, a giant PRC petrochemical company, is aiming for a market debut before the colony's handover. Yanhua has a great story: rapidly cutting costs, it's a market leader in the high end of China's petrochemical market - a market that is growing rapidly.
But worldwide market forces are stacking up against this IPO: the international petrochemical cycle is in a downturn and won't hit bottom for another year and a half. Analysts are skeptical about the prospects for a petrochemical equity offering anywhere in the world, much less from the unpredictable climate of China.
Undeterred and confident, Yanhua and its bankers powered through an accelerated offering timetable to raise $239 mn in Hong Kong and New York - the last Chinese listing before the handover. Within two months the stock was trading at double its offering price, three times its post-IPO low. 'Investors are generally happy,' states Gregory Rider, senior managing director at Bear Stearns, Yanhua's lead underwriter.
As head of international equity capital markets at Bear Stearns, Rider is instrumental in tricky offerings like Yanhua's. His job is to help decide the price range of an offering, keep the 'book' balancing supply and demand in the period leading up to the start of trading, then determine the stock's initial price. With his ear to pulse of the sales desks, few market players have the feel for investor sentiment that Rider has.
'Investors are getting extremely particular about what they buy, and especially about valuations on H-share issues like Yanhua,' he says, explaining that Bear wanted to launch Yanhua's IPO before the uncertainty over China's policies kicked in after the handover. 'We didn't want to take the risk that a good story was going to be told at the wrong time.'
Notably, there were some new China investors in the audience during Yanhua's global roadshow. Besides emerging markets, Asian and global specialist funds, Bear's sales forces managed to spark interest in 'cross-over' investors - petrochemical sector investors making their first foray into an Asia Pacific company. Rider says they were an important factor in the offering.
As with last year's IPO by Guangshen Railway, Yanhua's dual share structure - an H-share listed in Hong Kong and an ADR in New York - has proved a successful one for a Chinese company. 'These stocks have tremendous liquidity in the home market, which is often not the case with ADRs from other emerging markets,' Rider remarks. 'It's because Hong Kong is such an equity oriented marketplace.'
Also, investors in Hong Kong often have different investment objectives compared to investors elsewhere. 'Certain types of information and market forces can move the market in Hong Kong that may not move the market in New York,' Rider says. 'For example, any rumors of policy changes in China are much better understood and acted upon by sophisticated Hong Kong investors, whereas investors elsewhere generally have to react rather than act.'
Looking ahead, Rider says there is still active interest in new issues from international investors. 'The handover has caused little adverse effect on investor sentiment towards the region,' he reports.
Rider adds that Chinese companies are getting more sophisticated at IR. 'Listing on the NYSE is a pretty good quality control check. Besides, we make sure companies employ professional IR companies and follow up with post-offering roadshows. In general, they are now getting more forthcoming with news - good or bad.'
Despite continuing currency problems in Asia, Rider concludes that Hong Kong and Chinese markets are going to be strong going forward.
Post Peso Pizazz
While making Asia Pacific inroads, Bear Stearns' number one emerging markets focus is Latin America. And it's the region perhaps closest to Rider's heart. He came in May from Merrill Lynch where he was director of equity capital markets for Latin America. Before that he was Smith New Court's managing director for Latin American investment banking and equity capital markets activities.
'All the fundamentals are there,' Rider says of the region. 'These are high growth markets where inflation has been brought under control, while privatization programs are in a mature phase in Chile, Mexico and Argentina, but just starting to roll out in Brazil.' Rider explains that macroeconomic and political reforms throughout the region have been institutionalized over the last several years, and investors are now comfortable with the investment environment. 'There's above average economic growth in stable market-oriented environments with - for the most part - stable democratic political reforms supporting them.'
Rider sees a Latin American boom underway: 'Multinational companies are going in on their own, buying and building factories, putting bricks and mortar and long-term investments in plant and equipment and personnel. That's a pretty good validation of a beneficial climate going forward.'
He notes that direct foreign investment in the region came to a screeching halt in the 1980s, then came creeping back again in the early 1990s, 'and now it's booming ahead, followed by equity investor interest in well-managed companies with good market positions in businesses that appeal to growing economies.'
Those types of businesses are obvious if you share Rider's down-to-earth view: 'GDP is growing and people have more disposable income; they drink more beer, drink more soda pop, and eat more food; they build better houses and start buying insurance. They travel more, drive more cars, and the roads need to be better; they use more electricity, they talk on the telephone more; basically they need all the things and forces that drive companies in the capital markets.'
And of course they want to watch TV. When Television Azteca, a fast-growing Mexican media company, came to the market in August with Bear Stearns as lead underwriter, investors were more than ready to shell out for the biggest Mexican IPO since the 1994 peso crisis.
Rider describes exceptionally strong investor interest during the three-week book-building period. 'Meanwhile, the Mexican market was moving up.' So on the day before the offering, the bankers upped Azteca's pricing range from $15-17 to $17-19. Priced at $18.25, the NYSE-listed ADR went on to trade well, even though it was launched on a day when the Dow plummeted 247 points. Analysts and media declared a revival of confidence in Mexico.
Are high valuations in the US market driving investors overseas? That's not necessarily the reason behind thriving global investment, says Rider. He recalls strategy planning sessions in 1995 when US equity markets were rapidly growing. 'We concluded that US markets would not grow at double digit rates forever, so investors had to look overseas for higher rates of return. That turned out to be partly true, with the peso devaluation forgotten and major offerings like Telefonica del Peru validating emerging markets again. But still the US market kept forging ahead.'
The explanation for investor interest in overseas markets, Rider says, lies in the huge flow of money into equity mutual funds in general. 'The US market boomed ahead and people pulled out of fixed income and cash and charged into mutual funds - not just domestic funds but global ones too. International funds have been receiving their fair share.'
In fact, until mid-summer, at least, inflows in to global equity mutual funds were running at record highs. 'So the overall equity boom has been not only driving the US market, but fostering increased investment internationally.'
Investors are still value conscious, Rider insists. 'It's just that there has been such a huge amount of new liquidity that investor appetite for equities is seemingly limitless. Of course there is a limit at some point, and we're now seeing volatility causing equity investors to be more cautious.'
But, according to Rider, nothing - barring a renewal of rampant emerging markets inflation or a cataclysm in the US market spilling over - is likely to dampen the high pace of overseas investment for the foreseeable future.
Most market players say bookbuilding is an art - not a science, not even finance. And when it comes to overseas companies raising capital, the mark of a great master is the ability to finely balance international and local demand.
'We pay very, very close attention to getting the correct tranche sizes at the start of a deal,' says Greg Rider.
Rider gauges international institutional investor sentiment to determine the liquidity they want in the home market compared to overseas. Past experience also plays a role in determining the optimal balance: a Mexican offering, for example, usually has 20-25 percent placed in the home market. 'International investors must be convinced there is the right kind of liquidity and quality of investors outside the home market', explains Rider. 'Meanwhile, for perceptual and prestige purposes, the company typically likes to have as large and successful offering in their home market as fits their objective.'
Sometimes it all just boils down to a battle of wills between international and local underwriters: who has the strongest book and who has done the best job of placing the shares.
In Latin American countries, hometown investors are more and more capable of handling bigger and bigger issues. 'Chile's pension fund system is so mature and sophisticated that if it weren't for percentage limits on company holdings, Chile would be a virtually self-financing country', avers Rider. 'In many respects it already is, and the amount of money available in the system could finance virtually any equity offering.'
The effect in Chile has been higher valuations: 'Whenever there's a lot of money chasing a few companies, investors are willing to pay more.'
Throughout the region, Rider notes, pension fund privatization is generating a tremendous amount of investment capacity. Argentina, for example, is coming on strong with inflows into the country's pension scheme proceeding apace, promoting equity as well as debt investment.
'Latin American institutional investors are becoming increasingly sophisticated,' the banker declares. 'Give it another decade and the region's whole financing system is going to look a lot different. There's going to be a lot more homegrown equity and debt financing.'