HONG KONG - China’s initial public offering (IPO) market looks set for another
buoyant year as strong liquidity and confidence in the country’s economic
prospects overcome investors' global economic concerns linked to the spreading
subprime crisis and fears of a recession in the US.
The number of Chinese IPOs is expected to grow to 135 this year from 125 last
year, with funds raised increasing to 480 billion yuan (US$66 billion) this
year from 477.1 billion yuan last year, according to a report by
PricewaterhouseCoopers (PwC). The
world’s leading accounting firm expected most of this year’s IPOs to be
launched in the finance, real estate, retail, and mining sectors.
Of the upcoming IPOs, 35 are expected to be launched on the Shanghai Stock
Exchange, with their relatively larger size resulting in the funds they raise -
estimated at 440 billion yuan - outstripping the 40 billion yuan that may be
raised from the remaining 100 offerings, which are expected to go through
Shenzhen’s Small and Medium Enterprises Board, PwC said.
Mainland companies already listed in Hong Kong, known as red chips and
H-shares, will play a significant role in raising funds in the A-share market,
PwC said. H-share companies are incorporated in mainland China, while red chips
are incorporated and listed in Hong Kong though their businesses are on the
mainland. Most major H-share companies have already established a secondary
listing on the domestic market while many red chips are waiting for Beijing’s
green light to do so.
As red chips are not incorporated domestically, they are regarded as foreign
companies. Chinese regulations at present forbid foreign companies from going
public on the A-share markets, they have so far been barred from launching
A-share IPOs at home.
"As many large H-share companies have already issued A shares, the number of
H-share returns will decrease in the A-share IPO market, which will be
supported by the red-chip returns, and foreign enterprises,'' Edmond Chan,
partner of PwC’s Capital Market Services Groups, said. He expected red chips to
start listing on the mainland market in the second half of this year.
Of the 440 billion yuan expected to be raised in the Shanghai Stock Exchange,
H-share companies could raise 145 billion yuan and red chips a similar amount,
with the remaining 150 billion yuan from domestic companies listing for the
first time.
''Although the world is still overshadowed by subprime concerns that upset
markets in recent months, the mainland stock market will flourish due to its
excess liquidity and strong economy, helped by domestic demand,'' said Mr Chan.
Accountants Ernst & Young forecasts that 330 billion yuan will be raised on
the A-share market, with the share of privately owned enterprises in the
overall A-share market increasing.
''There will be large overseas or Hong Kong companies listing A shares,'' said
Ernst & Young partner and risk advisory services leader Paul Go. ''Despite
ongoing market uncertainty, there is a strong pipeline of IPO-ready companies
planning to list in 2008.''
Among the big IPOs due in the coming months is China Railway Construction Corp
(CRCC), the country’s second-largest construction firm, which aims to raise a
total of 25 billion yuan by issuing A shares and H shares, making it likely to
be the biggest IPO in the first quarter. China is trying to expand its railway
lines from the current 78,000-km network to more than 90,000 km by 2010.
Established in 1948 as the railway arm of the People’s Liberation Army, CRCC
was transferred to the Ministry of Railways in 1984 and is now under the
administration of the State-owned Assets Supervision and Administration
Commission.
Among potential red chips aiming for a mainland listing, China National
Offshore Oil Corp (CNOOC), the country's biggest offshore oil producer, and
China Mobile Communications Corp are likely to float A shares in the first
half. CNOOC chairman Fu Chengyu told reporters after the EU-China Business
Summit in Beijing in November that he did not foresee any major regulatory
obstacles to selling the yuan-denominated stock.
The government may require these companies to have at least one billion yuan in
annual net profit before selling shares on the mainland, according to the
Securities Times.
PwC and Ernst & Young said the mainland capital market maintained its
competitiveness in 2007, overtaking the United States market, which includes
the New York Stock Exchange, NASDAQ and American Stock Exchange, and the Hong
Kong stock market, in terms of capitalization of IPOs.
According to data provided by PwC, the value of IPOs in Shanghai and Shenzhen
topped HK$496 billion (US$63.5 billion) in 2007 while the US market raised a
total of HK$492 billion. The London Stock Exchange was third, raising HK$387
billion; Hong Kong was fourth with HK$295 billion last year.
The amount of funds raised through IPOs in the A-share market last year reached
HK$455 billion, dominated by H-share companies going public in their home
country.
Four out of the top 10 IPOs in the A-share market last year were H shares
selling A-shares on the mainland in terms of amount. PetroChina raised US$8.91
billion from an A-share IPO, making it the largest domestic stock offering,
followed by the US$8.86 billion A-share issue from China Shenhua Energy. The
third-largest domestic stock offering was the 58.05 billion yuan float of China
Construction Bank. They dwarfed the US$4.8 billion listing of private equity
group Blackstone, the largest offering on the New York Stock Exchange.
The fourth-largest domestic stock offering was by Ping An Insurance, the
mainland’s second-largest life insurer, which raised 38.87 billion yuan in
February, 2007.
Ringo Choi, an assurance and advisory business services partner at Ernst &
Young, said that a significant share of the funds raised in the mainland was
from H-share returnees and A- and H-share sales by state-owned enterprises,
while a majority of the privately owned enterprises with IPOs chose to list in
Hong Kong and overseas exchanges.
He said the listings boom reflected the mainland’s robust economic growth.
''The surge in IPO activity in China is a clear reflection of the growth in the
Chinese economy and the confidence investors have about putting their money
into China,'' Choi said.
With the blessing of the central government, the Hong Kong capital market will
retain its leading position as a fund-raising hub for international capital by
continuing to attract Chinese companies, particularly mid-cap companies, PwC’s
assurance partner Richard Sun said. Hong Kong’s IPO activity would continue to
pick up this year but total raised funds would drop in the absence of large
listings, he said.
''As many large companies have already been listed, mid-cap companies will lead
the Hong Kong IPO market this year,'' he said.
The number of IPOs in Hong Kong totaled 86 last year, up 34% on 2006. Since
most of the giant Chinese companies have already been listed, the lack of
mega-IPOs drove down the total IPO funds raised to HK$295 billion in 2007.
''Though the absence of huge listings are expected, Hong Kong will continue to
be the major platform for Chinese and overseas companies to gain international
exposure,” Sun said.
He expected the volume of new listings to hit 90 in 2008, while the capital
raised will be HK$280 billion, almost the same as 2007, driven by the listings
of mid-cap Chinese enterprises.
''Hong Kong is renowned for its free flow of capital, established regulatory
framework, legal system and experienced finance professionals,'' said Sun.
''Over the past few years, the Hong Kong government and finance professionals
have been working hard to promote the city’s strength and advantages to
overseas companies, particularly to those in emerging markets. We will see more
foreign-owned companies raising funds via listings in Hong Kong.''
Olivia Chung is a senior Asia Times Online reporter.
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