Bankers See Fees Fade as China Era of Jumbo IPOs Draws to Close

The initial public offering of People’s Insurance Company (Group) of China last week was notable as Hong Kong’s largest in two years. Bankers still don’t anticipate it augurs a new round of big Chinese IPOs.

The reason: Most of the biggest Chinese state-owned companies have already gone public in the last 15 years in Shanghai and Hong Kong. Private-sector businesses, beset by shrinking profits amid overcapacity and rising labor costs, aren’t likely to fill the void anytime soon, according to investment bankers and deal lawyers.

“The days of $20 billion Chinese IPOs are probably gone,” Fang Fang, JPMorgan Chase & Co.’s chief executive officer in China, said in an interview. In July 2010 Agricultural Bank of China Ltd. (601288) raised $22.1 billion in Hong Kong and Shanghai, the biggest IPO in history.

The lack of megadeals comes amid a pronounced slump for IPOs in Hong Kong of any size. The value of initial share sales has fallen to $6.6 billion so far in 2012 from $58 billion in 2010, putting the city on pace for its worst year since at least 2003, when companies raised $7.5 billion there, according to data compiled by Bloomberg.

This year’s total includes the $3.1 billion offering of PICC Group, which required $1.82 billion of pre-negotiated investments with American International Group Inc. (AIG) and 16 other so-called cornerstone investors to complete the deal.

Photographer: Keith Bedford/Bloomberg

A man walks past a People's Insurance Co. of China Group (PICC) subsidiary office in Beijing, China, on Tuesday, July 19, 2011. PICC is planning an initial public offering in Hong Kong and mainland China. Close

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Photographer: Keith Bedford/Bloomberg

A man walks past a People's Insurance Co. of China Group (PICC) subsidiary office in Beijing, China, on Tuesday, July 19, 2011. PICC is planning an initial public offering in Hong Kong and mainland China.

The downturn leaves investment banks in Hong Kong grappling with a fundamental shift in their business. This year they will derive about a third of revenue from arranging share sales, down from about 70 percent in 2009 and 2010, according to estimates from executives at five firms who asked not to be named.

IPO Era

The shift may presage additional financial job cuts in the city, according to David Hui, Hong Kong-based managing partner at executive search firm Asia Carbon.

“Investment banks in Hong Kong are overstaffed for current deal flows and need to do lots of cost managing,” Hui said.

Globally, Chinese companies have raised $20.1 billion in IPOs this year, down 58 percent from the same period in 2011 and the lowest since 2008, data compiled by Bloomberg show. The average size, excluding PICC Group, was $95 million. In the second-biggest Chinese IPO this year after PICC Group’s, Citic Heavy Industries Co. raised $507 million on June 25 in Shanghai.

China Mobile Ltd. (941) kicked off the era of IPOs by state-owned enterprises, or SOEs, when it raised $3.9 billion in Hong Kong in October 1997 -- months after the territory’s handover to China from the U.K. China’s economy was then less than a fifth of its current size and the government was pushing SOEs to go public to make them more competitive.

SOE Dominance

Since then, 58 Chinese SOEs have completed IPOs of at least $1 billion, raising a combined $183 billion, data compiled by Bloomberg show. China was heading for its first year since 1999 without a billion-dollar IPO until the PICC offering was completed.

SOEs account for 91 of the 100 biggest Chinese companies, according to a September survey by China Enterprise Confederation, a business association headed by retired government officials and top executives at some of the country’s biggest SOEs. Among them, 85 already have publicly traded units.

By contrast, private-sector Chinese firms have completed just 13 billion-dollar deals worldwide since 1997, raising a total of $20 billion, data compiled by Bloomberg show.

Deals Delayed

The flood of deals by Chinese SOEs slowed to a trickle in the past two years, as growth in the world’s second-largest economy cooled for seven straight quarters. China Railway Materials Co., XCMG Construction Machinery Co. and China Guangfa Bank Co. are among government-controlled companies that have delayed share sale plans amid slack investor demand.

“In the past years we had many large equity capital market transactions coming from privatization of big sectors in China, and we will still see some of those, but overall the number of big national candidates is running down,” said William Barron, Hong Kong-based partner at Davis Polk & Wardwell LLP.

Amid the drought of large IPOs, fees for underwriting first-time share sales have fallen to the lowest since 2008, helping push some banks to quit the market altogether and others to slash jobs. The $247 million of fees from such deals so far in 2012 is down from an average $775 million annually since 2006, according to data compiled by Bloomberg.

Giving Up

Renaissance Capital Ltd., the Russian investment bank backed by billionaire Mikhail Prokhorov, gave up its Hong Kong underwriting licenses in September, while South Korea’s Samsung Securities Co. closed its investment banking units in the city early this year. Banks including China International Capital Corp., Daiwa Securities Group Inc., Guosen Securities Co. and UBS AG have cut jobs at their equity underwriting teams, people with knowledge of the matter said. Spokespeople at the banks declined to comment.

In total, banks have shrunk headcount at equity underwriting operations in Hong Kong by at least 10 percent this year, according to estimates by managing directors at three investment banks in the city. They asked not to be identified because they aren’t authorized to discuss the matter publicly.

“The lack of big IPOs is putting pressure on everyone,” JPMorgan’s Fang said. “We need to be more innovative in product design, improve the productivity of individual bankers, hire effective ones and weed out weak ones.”

As business from SOEs dries up, the focus is shifting to private companies, said Fang.

Slim Pickings

The pickings are slim. Of the nine companies not state- owned among the China Enterprise Confederation’s top 100 list, only one isn’t already traded: Huawei Technologies Co., China’s largest maker of telephone equipment.

An IPO by Huawei in Hong Kong or overseas may be unlikely in the near term, after the U.S. House Intelligence Committee labeled the company a spying threat and urged U.S. companies to steer clear of doing business with Huawei and Chinese rival ZTE Corp. Scott Sykes, a Huawei spokesman, said the company has no plans to go public.

Alibaba Group Holding Ltd., China’s largest e-commerce company, and 360buy Jingdong Mall, the Chinese Internet retailer that raised $1.5 billion in venture financing last year, are among privately-owned companies cited by bankers as candidates for large IPOs.

“We have no plans for an IPO at this time,” Alibaba spokesman John Spelich said in an e-mail, without elaborating. 360buy said in June that it won’t pursue an IPO before next year. Company officials weren’t reachable for comment.

Cheaper Capital

Privately owned companies play second fiddle to SOEs in China’s economy, further dampening their IPO prospects. Total profits at private firms fell 10 percent last year from 2010 while net income at SOEs jumped 20 percent, data from the China Enterprise Confederation show.

State-owned companies benefit from access to cheaper capital, land and natural resources while producing “relatively small shares of gross output and value added” compared with the private sector, according to a joint research report by the World Bank and the Development Research Center of China’s State Council, published in February.

Liang Wengen, chairman of Sany Heavy Industry Co., on Nov. 12 called on China’s new leadership to give more space for private companies to grow. Xi Jinping last month replaced Hu Jintao as head of the Chinese Communist Party and the nation’s military in a once-a-decade transition of power.

As jumbo IPOs dry up, investment banks will rely more on debt capital markets and mergers and acquisitions for their China revenue, said Yang Zhizhong, Nomura’s chairman of investment banking in Asia outside Japan.

“Investment bankers need to have more tools in their toolkits these days,” Yang said. “It’s no longer possible to focus only on IPOs -- you risk becoming a dinosaur.”

To contact the reporters on this story: Fox Hu in Hong Kong at fhu7@bloomberg.net; Zijing Wu in Hong Kong at zwu17@bloomberg.net.

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net.

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