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Nov 10, 2010

The sun rises on the eastern IPO

Asian exchanges set to raise more than $70 bn in capital in 2010

After the momentous demolition of the Berlin Wall in 1989, Francis Fukuyama argued in his essay ‘The end of history?’ that humanity’s evolution had reached its final endpoint. The end of the Berlin Wall symbolized the end of the East-West division and the triumph of liberal democracy.

Twenty years on and matters are considerably more complicated. Firstly, the liberal democracy is not universal. Secondly, one of its biggest ideological opponents also happens to be one of the biggest and fastest growing economies in the world. The ascent of China, with its sheer strength and markedly different politics, can be a bitter pill for the West to swallow, and this is being increasingly compounded by the insecurity that China may no longer need the West as it once did.

London’s junior exchange, the Alternative Investment Market (AIM), has seen its market share in IPOs shrink from 4.7 percent in 2006 to 0.6 percent in 2010. And the London Stock Exchange (LSE) has seen its IPO market share dip from around 15 percent to 4 percent over the same period. At the peak of the recession, AIM-listed companies were de-listing at a rate of around 70 a quarter. Despite improved conditions the number of de-listings increased by 25 percent in the three months preceding October 2010. And nearly half of the 45 companies that de-listed from AIM during that period left as a result of a deal with another group.

While London has suffered, Shenzhen has enjoyed explosive growth during the last four years. In 2006 companies raised $2.4 bn from 60 listings; by 2010 that figure had ballooned to $33.5 bn from 243 issues (year to date), three times the amount raised on the NYSE over the same period.

Thanks to its established position as a key financial center in Asia, and assisted by zero capital flow restrictions, Hong Kong has also benefited from the adjustment, with the blockbuster IPOs of AIA (formerly part of AIG Group) and Russian aluminum mining company UC Rusal earlier this year.

Crucially, the gamble the Hong Kong Stock Exchange (HKEx) took on Rusal may have paid off, at least in the medium term. Despite reservations over the firm’s controversial ‘red pen’ prospectus and an initial 10 percent share price slump in the aftermath of the IPO, the share price has recovered ground and now stands pretty much where it was when it listed back in January.

Best use of resources
Rusal’s recent resilience, coupled with the global boom in commodities and natural resources, seems to have spurred on HKEx to win the battle for new listings. The exchange is working to diversify into different sectors, moving away from the historical dominance of financial services and property companies. In May this year, the exchange clarified its Chapter 18 rules for minerals companies listing on its main board. The move is expected by some to promote the flow of resources firms listing in Hong Kong, providing fodder for China’s current insatiable appetite for natural resources.

‘Previously resources and minerals companies needed to negotiate with the HKEx regarding their listing applications on a case-by-case basis,’ explains Gordon Ng, partner at O’Melveny & Myers’ Hong Kong office and a member of the corporate finance and capital markets practice.

Obstacles to expansion
The amendments won’t necessarily make a listing in Hong Kong less onerous. The new rules will increase the amount of information minerals companies must provide to the HKEx, which – unlike many mining-focused exchanges, such as Sydney and Toronto – does not permit exploration companies to list unless they can prove the existence of exploitable natural resources reserves.

Hong Kong’s exchange is not stopping at resources companies. ‘The HKEx takes a very active approach to attract foreign issuers,’ Ng explains. ‘It now accepts a lot more overseas jurisdictions as acceptable places of incorporation for issuers. It has also made itself more accessible and approachable for consultations, and welcomes innovative ideas for new products and services.’

Liquidity and innovation come at a price, however. HKEx remains a relatively costly option for issuers when compared with its competitors in Singapore or China, Ng points out.

These moves in Hong Kong have not gone unnoticed by other exchanges in the region: the proposed $8.2 bn takeover of the Australian Stock Exchange by Singapore Exchange could signal more regional tie-ups as bourses seek to improve competitiveness.

Yusli Mohamed Yusoff, chief executive of Bursa Malaysia, thinks the Asian bourses – and especially those in emerging market areas – are becoming increasingly attractive to international issuers. ‘This is mainly due to the potential growth in the emerging markets, their resilient economies and their fiscal and currency strength,’ he explains.

Like other Asian exchanges, Bursa Malaysia is actively promoting its stock exchanges to foreign issuers. ‘Asian bourses are now adopting international governance standards and new trading technology,’ Yusoff adds.  

Money to spend
This is not to say investor appetite in the West is on the wane. Emerging market growth stories have rarely been so appetizing to investors and this is fuelling a flood of money into emerging market stocks. Take the example of Petrobras: its recent capital raising saw it increase its share capital by $70 bn dollars, raising $26 bn of cash (see The world’s biggest share issue, page 30).

Ted Helms, executive manager of IR at Petrobras, thinks the firm’s record-breaking capital raising is symptomatic of a significant change of attitude. ‘You don’t have to be adventurous to invest in Brazil anymore,’ he says. ‘It’s now a part of a conservative portfolio. There has definitely been a broad shift in perception.’

The long-term picture will depend on the long-term viability of the current boom in interest in the emerging markets. Michael Geoghegan, chief executive of HSBC, has already cautioned on emerging markets, noting ‘the likelihood of some bumps in the road ahead.’ Whether these bumps will help the plight of the established exchanges in New York and London remains to be seen.

Even with emerging market demand riding high, several exchanges have suffered delays and cancellations of proposed emerging market IPOs due to shaky investor demand. Russian manufacturer Monocrystal recently pulled its London listing due to ‘considerable volatility in global equity markets.’

There has been some comforting news, however. As IR magazine went to press, specialty chemicals manufacturer AZ Electronic Materials was set to increase the amount it will raise from a London listing in a sign of improving investor appetite for IPOs. It was initially hoped AZ’s listing would raise around $500 mn; that figure is now said to be $800 mn.

This is relatively small fry in the bigger picture, however. Ultimately, the exchanges that win market share in the battle for listings will be those that successfully woo the scores of Chinese companies looking to capitalize on investor demand.

Biggest exchanges by IPO value

Exchange YTD proceeds £ bn Market share % Number of issues
Shenzhen 33.5 21.0 243
HKEx 23.3 14.6 53
Shanghai 22.3 14.0 17
NYSE 11.1 7.0 55
London 6.3 3.9 14
NASDAQ 5.9 3.7 52