Hong Kong rebound opens ECM window

IFR 2299 7 September to 13 September 2019
4 min read
Asia
Fiona Lau

A close to 1,000-point rally in the Hong Kong stock market last Wednesday, following the government’s proposed formal withdrawal of an extradition bill, has opened a window for equity offerings in the city.

Fuelled by hope that the concession may help bring three months of protests in the former British colony to a close, the benchmark Hang Seng Index surged by 3.9% or 995.38 points to 26,523.23 last Wednesday. The market held up well in the next two days, with the index ending at 26,690.76 on Friday.

Banks immediately sprang into action to raise funds for clients. Sole bookrunner Goldman Sachs on Thursday helped SK E&S Co offload a HK$5.1bn (US$651m) stake in Hong Kong-listed natural gas provider China Gas.

“We saw strong momentum in the Hong Kong market after Carrie Lam’s [Hong Kong’s chief executive] announcement. China Gas is the first deal after that, so it’s hard to say there is a general revival of investment interest but it’s definitely a more constructive environment,” said a person close to the deal.

Although China Gas traded close to its 52-week high before the deal was launched, the transaction was upsized to accommodate strong demand.

The deal was marketed to raise up to HK$4.97bn through the sale of 158.5m secondary shares in an indicative price range of HK$29.70–$31.35 per share. It was eventually upsized to about 170m shares, or 3.3% of the total outstanding, and was priced at HK$30 per share, or a discount of 7.3% to Thursday’s close of HK$32.35.

Books were multiple times oversubscribed with more than 80 investors participating. There was good support from long-only, sovereign wealth and hedge funds. Allocations were concentrated, with the top 10 investors taking about three-quarters of the deal.

There is a 90-day lock-up on the seller.

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Bankers generally believe that the market rebound will encourage more follow-on offerings, though not necessarily IPOs.

“Some hedge funds are keen to flip on the mood changes in the markets. A follow-on offering with reasonable discount is the kind of deal that will interest them,” said an ECM banker.

“Some protesters are asking for more than withdrawal of the bill, so it’s hard to say whether the city will have its calm back,” said another banker. “Apart from the Hong Kong situation, the development of Brexit and the US-China trade war also affect market sentiment. It’s especially challenging for IPOs as it normally takes weeks to complete a transaction.”

Fosun-backed Shanghai Henlius Biotech, for example, was looking to open books for a Hong Kong IPO of about US$500m on September 9 but has now pushed the launch to mid-week to give it more time to secure cornerstone demand.

It may sell about 30% of the IPO shares to cornerstone investors, said people involved.

The subsidiary of Shanghai Fosun Pharmaceutical and Fosun International has launched one drug commercially and has more than 20 biologics drug candidates in its pipeline with a focus on oncology and autoimmune diseases. A pre-IPO financing in November 2018 valued the company at about US$3bn.

At least three other sizeable listing candidates are closely watching the response to the Henlius deal.

Czech consumer finance company Home Credit (US$1.5bn) and Chinese lender Bank of Guizhou (US$1bn) are pre-marketing IPOs, while Topsports International, the sportswear business of Chinese footwear retailer Belle International, is set to start pre-marketing a US$1bn IPO this week.