The blame game

Source: Reuters/Aly Song Lightning is seen above buildings during a storm in central Shanghai Anyone with a vested interest in Asia’s equity-capital markets must be finding it tough to stay optimistic. Companies have been forced to pull deals all over the place, with another four falling by the wayside last week alone. Slumping revenues are forcing bankers to rethink the way they allocate resources to Asian ECM – traditionally, the cash cow of investment banking in the region. The global turmoil that has derailed so many listings is showing no sign of easing: the eurozone tumult alone is threatening to keep markets shut until at least the end of June, as investors wait for more clarity on Greece’s future. Asian ECM has certainly had better years. Even China, the source of the bulk of banking revenues over the past decade, is no longer a sure thing. Rather than piling into the next billion-dollar IPO, investors are asking if the country’s runaway growth can continue as the economy shifts towards a consumption model. Hong Kong – the world’s busiest market for new listings for each of the last three years – has had its slowest start to the year since 2003, with just US$1.36bn raised in the first five months. As depressing as all that may sound, there is also some room for hope. While the traditionally busy China and Hong Kong markets have slipped, others in the region are stepping up. Singapore is luring more foreign issuers than ever. While market conditions will still pose challenges, the arrival of the likes of Formula 1 and Manchester United – following last year’s blockbuster from Hutchison Ports – shows that its exchange’s appeal to overseas issuers is now firmly established. At least, when it comes to certain industries and structures, Singapore has opened up a comfortable lead over Hong Kong. More broadly, South-East Asia now seems to be in the ascendancy. While listings in Hong Kong are struggling, Malaysia is preparing to welcome two of the biggest new floats of the year. Its strong domestic liquidity and years of pent-up demand mean more are likely to follow. The Philippines is following through on its promise to put more shares in public hands, by enforcing its underused free-float rules to address the scores of thinly traded stocks. Indonesia, too, is well placed to capitalise on its new investment-grade rating – although it needs to learn from its earlier mistakes if it is to restart its programme of privatisations. As one door closes, another opens. To restore confidence in Asian ECM, however, a few more need to stay open. To see the digital version on this report, please click here.

Source: Reuters/Crack Palinggi People take naps at the Istiqlal Mosque after attending Friday prayers in Jakarta To see the digital version on this report, please click here. Follow-on offerings have accounted for the vast majority of Asia’s equity capital markets business so far in 2012. Slumping IPO volumes mean that follow-ons account for 78.9% of deals done in Asia Pacific this year, including Australia by outside Japan, up from 55.2% for the whole of 2011. Those figures, however, mask a growing number of deals that are new listings in all but name. Companies from India to Indonesia are under pressure to put more shares in public hands as regulators step up their efforts to improve market liquidity. The Philippines, where as many as 40 companies risk having their shares suspended – or eventually delisted – if they fail to increase their free floats by the end of this year, has become a steady source of business. “A re-IPO is essentially for really illiquid companies because their free float is too low and they’re being told by their regulators to do it. It’s not a special class of product. It’s more like an IPO than a follow on because, by its nature, it’s not owned by many people,” said one head of equity capital markets for Asia Pacific. Philippines casino and hotel operator Bloomberry Resorts in early May priced a US$210m follow-on offering that increased its free float from 8.8% to around 20%. Century Property Group priced a US$54.5m deal in February, following on from a backdoor listing in 2011. Oil refiner Petron completed a Ps7.6bn (US$174m) block at the start of the year. More are likely to follow from the Philippines, given the number of companies falling foul of the exchange’s rules that require a minimum free float of 10% by the end of the year. Government-owned PNOC Exploration Corp has confirmed plans to boost its free float, while Maybank Kim Eng is said to have held non-deal investor roadshows for food producer San Miguel Pure Foods. Pure Foods has a tiny free float of just 0.08% and is required to meet the regulatory minimum of 10% by the end of this year. In Indonesia, parent Indika Energy priced a US$100m block of Petrosea shares, effectively a re-IPO, in early February at a 20% discount to its February 1 close. Tempo Scan Pacific’s Rp2.1trn (US$228m) re-IPO in May remains the largest Indonesian equity transaction so far this year. The pharmaceuticals company, which had a turnover of about US$200,000 a day, held a four-day bookbuild while the stock continued to trade, prompting fears that just a handful of sell orders could drag the stock below the target range. On top of that, the company had earlier decided against non-deal roadshows, and only two domestic firms had research coverage of the stock. Nevertheless, Tempo Scan managed to dodge market risk and price an upsized deal at the top of its target range. Tricky deals Not every deal has been such plain sailing, however. The Petrosea block came far below the bottom-end of its guidance range, while Petron completed its deal only by offering a 17.3% discount to the last share price. Indonesian insurance firm Sinar Mas Multiartha was forced to pull its re-IPO after premarketing in February. An offering of primary and secondary shares had been expected to raise around US$400m, via Deutsche Bank and UBS. The challenge for arrangers is that the quoted price for an illiquid stock may offer little indication of the price other investors will pay. In many cases, trading is likely to remain thin even after the follow-on. Bankers say only a limited universe of investors are interested in such infrequently traded stocks, giving them a lot of power over pricing. San Miguel Pure Foods, for instance, has a market capitalisation of around US$3.9bn, based on its 0.08% free float. When San Miguel Corp put the stake up for sale in an unsuccessful auction in 2010, however, the company was said to be worth around US$1.3bn. With so many more re-IPOs in the pipeline – and m

Source: Reuters/Stringer China Investor sleeps on a bench in front of an electronic board showing stock information at a brokerage house in Huaibei To see the digital version on this report, please click here. Hong Kong’s IPO market has had a terrible start to 2012. The only IPO of more than US$1bn done in the year to date has been the US$1.84bn float of Haitong Securities, China’s second-largest brokerage, and recent deals are struggling. The drought is expected to last until the end of the third quarter, when there is expected to be more clarity over Europe’s debt crisis. IPO volumes in Hong Kong plunged more than 80% in the first five months of the year, compared with the same period last year, as investors chose to stay on the sidelines amid falling markets. There was hope that the completion of Haitong’s listing in April would bring some excitement to the market, but renewed weakness in global markets killed off all such hope. As of May 28, the Hong Kong stock market had fallen more than 9% since Haitong’s trading debut, amid concerns over the lingering Europe debt crisis and a slowdown in China’s economic growth. Haitong’s share closed at HK$10.26 on May 28, 3.2% below the IPO price. A number of companies tried to push their deals ahead after Haitong’s listing, but they either failed or are struggling. China Yongda Automobiles Services, for instance, scrapped its proposed Hong Kong IPO of up to HK$3.37bn (US$433m) after failing to attract enough demand from investors. China Nonferrous Mining Corp, which was supposed to close books on May 24 for its Hong Kong float of up to HK$2.44bn, extended its bookbuilding period in the hope of dragging the deal across finish line but threw in the towel on May 30. The US$1bn Hong Kong IPO of London-based Graff Diamonds, a high-end jeweller catering to the super-rich, draw a lot of attention from global long-only funds, but it, too, threw in the towel last week. Bankers believe the worst may be yet to come, and the issuance window for IPOs will only reappear at the end of the third quarter at the earliest. “The global markets should be more stable then. The Greek or the Spanish situations will probably be more certain. The problems cannot be solved very easily, but, at least, there is some certainty of what’s going to happen. I think investors are looking for certainty rather than resolution,” said Wang Chang Hong, head of ECM at Citic Securities International. David Douglas, global head of equity capital markets at Standard Chartered, also reckons the market will only re-open post-August, though there are already signs of revival of global investors’ interest to the region. “It’s a very difficult time to execute any deals. The good news is funds in London and Europe start thinking the sell-off in China is going too far, to the level that investors are now looking to start relocating their money back to the region,” said Douglas. No quick fix Despite the market challenges, some major issuers are still keen to push on with their deals in June in order to avoid spending a few more months to update financial figures, which are due to expire at the end of June. China Everbright Bank and Sany Heavy Industry, for instance, are among the issuers looking to bring back floats that were shelved last year. CEB is looking to raise US$2.5bn, while Sany is targeting US$2bn, in June or July. However, it is generally expected that only deals with compelling equity stories and reasonable valuations will get done. “We are seeing issuers beginning to be more rational in valuations,” said Douglas. “They go one extra step to get their deals well prepared in areas such as corporate governance and information disclosures, so as to give themselves the best possible chance.” The stream of new deals in South-East Asia this year has also overshadowed the Hong Kong IPO market, raising questions over whether or not the bourse has lost its charm. For example, motorsport-related Formula 1 and plantation operator Fel

Source: Reuters/Bazuki Muhammad Ferrari Formula One driver Fernando Alonso of Spain celebrates on the podium after winning the Singapore F1 Grand Prix at the Marina Bay circuit To see the digital version on this report, please click here. In the battle between the two exchanges, the lines have always been drawn where Hong Kong gets all the China money and Singapore battles to be the regional hub for everything else. Lately, that second role has started to look increasingly useful. As well as continuing to attract listings from all over South-East Asia – and a fair few private sector names from China, too – Singapore is increasingly luring western multinationals. The most obvious current example is Formula 1, an expected US$2bn IPO. A marquee name in a different sport, Manchester United, is also expected to launch a US$1bn IPO in Singapore when markets are kinder. However, a host of less well-known non-Asian businesses – from Helsinki-listed Cargotec Corp to Middle East-owned Stanford Marine Group – are also considering Singapore because of the institutional and private wealth investor base that can be accessed through the exchange. This international interest “has been very much a part of what Magnus Bocker and the exchange have been trying to promote”, says Keith Magnus, chairman and head of investment banking for UBS in Singapore and Malaysia. “He (Bocker) sees Singapore and the SGX as the Asian gateway, meaning that, if you were looking to tap the Asian pool of funds, there is a very strong case to be made that you would select the SGX as your listing venue of choice.” There are two reasons for this – one is market liquidity, more specifically the access to the region’s institutional and private wealth and the other is the broader environment within which Singapore operates. Private wealth On the first point, “Singapore has emerged to be one of the most important wealth management hubs in Asia, with the largest institutional investor base of any country in the region,” says Magnus. “We have over $1.8trn under management in Singapore: it’s a huge pool of capital.” It also has a particular cachet. “You can access international investors both in Singapore and Hong Kong; the likes of Capital or Fidelity will invest in IPOs both in Singapore and Hong Kong,” says Tan Jeh Wuan, managing director, capital markets, at DBS. “However, each market has its own domestic following. The general consensus is that Hong Kong is a much larger market, but caters to companies that want more visibility in China or tap Chinese investors,” he says. “Other companies with a more international or South Asian footprint are more likely to consider Singapore.” In terms of Singapore’s broader environment, one part of its appeal is that it is the only Triple A rated country in Asia. “There are a number of Triple A rated countries across the world, but they’re a fast-dying breed and it’s something that really resonates with corporations when they look at a venue,” says Magnus. “It’s not just because it’s AAA, it’s all the things that come with that – governance, political stability, clarity on the rule of law.” Additionally, Singapore has long sought to give issuers and investors what they want. If it is an issue of a tax in the way, they remove it; if it is the lack of a structure, they build one; if there is a need for participants, it goes out there and coaxes them. Still, this can have mixed results. For many years, a keystone of Singapore’s international approach was to attract second-tier private-sector Chinese companies, which the big state-owned enterprises overshadowed in the Hong Kong market, and stood a better chance of attracting capital at a distance in the city state. These listings are locally called S-chips. Over the years, however, suggestions on what the S stands for have become somewhat less printable. Many of these companies have defaulted, delisted, run into accounting trouble, or simply stopped responding to any of their shareholders.

Source: Reuters/Beawiharta Beawiharta A woman uses her cellular phone near a banner of PT Garuda Indonesia in Jakarta To see the digital version on this report, please click here. The IPO last year of previously troubled flag carrier Garuda Indonesia should have been the triumphant ending to a complicated debt restructuring lasting several years. Instead, the Indonesian minister for state-owned enterprises made the inexplicable decision to ignore the feedback from the price-discovery process and choose a price level at which there was demand for only about half of the IPO shares. Domestic bookrunners Bahana, Danareksa and Mandiri found themselves saddled with about 3bn unsold shares and were told they could not sell them below the IPO price – even after the stock tanked on debut and kept falling. The combination of servicing the loans used to pay for the shares and the constraints on capital meant that Indonesia’s three big state-owned investment banks were limited in their ability to handle more large equity deals. Even though all three were public institutions, the government declined to step in and recapitalise them, leaving Bahana Securities, in particular, as an attractive takeover target. Garuda, named after a mythical bird, has become something of an albatross for Indonesia’s state-divestment programme. Since the IPO, no sizable equity offering has launched.. However, since his appointment as minister for state-owned enterprises, Dahlan Iskan has brought the no-nonsense approach to his new job from his time as president director of state electricity firm Perusahaan Listrik Negara. Within months of his arrival, the domestic bookrunners of the Garuda IPO had the selling ban lifted. Indonesian businessman Chairul Tanjung, who is behind Bank Mega, is reported to have purchased a stake of 10.3% in Garuda for Rp1.4trn (US$153m), removing the overhang from the undersubscribed IPO. Trans Airways, a unit of CT Corp, paid Rp620 per share to buy the 2.3bn shares that Bahana, Danareksa and Mandiri were left holding after the listing. This purchase was at a 3.3% premium to the April 11 closing price, but a 17.3% discount to the IPO price of Rp750 set in February 2011. Mandiri sold a further 0.6% stake on the open market. This effectively cleared the way for the government to proceed with its outstanding divestment programme and for the three banks to restore their risk appetites. The big deal on investors’ radar is the eventual privatisation of oil and gas giant Pertamina, but sources in Indonesia say the company requires extensive reorganisation before it is ready to list – although some subsidiaries, such as Pertamina Hulu Energi, may be spun off before then. No dates have been set, but no IPOs are expected from the group this year. Meanwhile, the government has taken the first step to consolidate its state-owned oil-palm plantation businesses under a single holding company, Perkebunan Nusantara (PTPN) III, involving assets of Rp50trn. It may list the first of the units, PTPN VII, as early as this year. It has also pushed ahead with the RFP process for two other smaller deals expected this year. Pawnshop operator Perum Pegadaian may do an IPO of up to Rp3trn, according to Indonesian bankers, while cement producer Semen Baturaja is also seeking bookrunners for a float of around Rp1trn. Airport operator Angkasa Pura II and port operator Pelindo II are also understood to be lining up for IPOs in the future. Meanwhile, units of Garuda and listed steel producer Krakatau Steel are also set for listings. Low-cost carrier Citilink, aircraft maintenance unit GMF Aero Asia and caterer Aerowisata, as well as Krakatau Wajatama, which makes steel bars and wires, are expected to be IPO candidates in the next round of divestments. Indonesia is still a hot favourite with foreign investors, but there has been little new equity issued this year for them to snap up. There has also been little to occupy Indonesia-focused equity bankers this year. How

Source: Reuters/Shi Tou A teacher falls backwards during a pressure releasing exercise at a high school in Chongqing To see the digital version on this report, please click here. Malaysia finds itself hosting two of the biggest IPOs in the region this year, and is doing so almost simultaneously. Is this a sign that Bursa Malaysia is reaching a level of increased depth and sophistication or should we expect indigestion? The two companies with upcoming IPOs are Felda Global Ventures and Parkway Pantai. Investors were examining Felda’s potentially US$3bn IPO at the time of writing, while Parkway Pantai, also known as Integrated Healthcare Holdings, is expected to raise around US$2bn in July. The IPOs of these companies represent two of the three biggest deals under way in the whole region – the other being that of Formula 1 in Singapore – with no other obvious candidates in the pipeline. How has it come about that Malaysia is supporting the IPO calendar for the entire region? “If you look at all the IPO markets across Asia, the most successful in terms of aftermarket performance is Malaysia,” says one regional investment banking head. With a wide range of international and local banks involved in the live deals, interviewees declined to go on the record for regulatory reasons. “If you go back to last year and look at Bumi Armada or Malaysian Sugar, they were a lot more successful for investors than any other market in Asia in generating returns from an IPO.” Domestic insulation Why is that? Another regional banker puts it down to the high proportion of domestic investors in the local market. “Roughly 60% to 70% in Malaysia today is domestic demand,” he says. “Even foreign institutions, like us, deal mostly with domestic accounts rather than foreign ones. These guys have much less concerns about what is happening in Greece and France than what is happening in the domestic market.” This makes Malaysia somewhat insulated from global shocks, at least in terms of getting new deals away. It helps that there is a solid institutional liquidity domestically in Malaysia, most obviously from the Employee Provident Fund, one of the region’s most prominent investors. Despite changes in its mandate to increase international investments, EPF is still overwhelmingly focussed on domestic equity holdings. “There is a lot of trapped liquidity, really. So, you’re not relying on the regional portfolio managers, but the home market,” says a banker. “There is a lot of comfort around it.” These reasons are adding to confidence that Malaysia can support two landmarks trades in a matter of weeks. At the time of writing, Felda, the more advanced of the two deals, appeared to be proceeding well. Having assigned around one third of the IPO shares to cornerstone investors, including Qatar’s sovereign wealth fund, Fidelity, high-net-worth investors and an insurance company, there was concern, instead, about other investors being able to get the allocations they sought. Some of the peculiarities of Malaysian investment exacerbate the situation with 11.5% of the company capital having to be reserved for Bumiputera investors, 7.5% for Malaysian retail, and 12% for the states within Malaysia, where Felda has plantations. CIMB, Maybank and Morgan Stanley are joint global co-ordinators on the IPO, and joint bookrunners with Deutsche Bank and JP Morgan. Felda’s road to market has not been entirely smooth. Initially, the listed vehicle was intended to include some assets from a settlers’ co-operative, called Koperasi Permodalan Felda. However, an injection from a group of settlers derailed the move in stopping KPF shareholders from voting on the plan. Then, a new structure was offered, with FGV as a holding company listing its 49% stake in subsidiary Felda Holdings, and the remainder being under control of KPF. As a result, KPF was able to hold its shareholder vote, overturn the injunction, and vote in favour of the original plan. Further negotiations followed before