Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

These are tough times for Hong Kong's initial public offering market.

Shares of Yadea, a Chinese manufacturer of electric bicycles, fell 23 percent on their trading debut Thursday after the company raised HK$1.1 billion ($144 million) selling stock at the low end of its targeted range.

Yadea is emblematic of how much has changed in a market that was the world's top fundraising venue as recently as the first five months of 2015. A year ago, investment bankers were feasting on the $4.5 billion IPO of Huatai Securities. Since then, China's markets tanked, offering sizes have fallen and deals are barely getting out the gate.

Despite its relatively small size, Yadea's offer boasted four underwriters -- JPMorgan, China Securities International, Huatai Securities and Alliance Capital -- a sign of the scramble for dwindling business.

It's not just Hong Kong. Global share sales are in a lull, much to the dismay of all those U.S. tech upstarts that raised billions of dollars in pre-flotation funding rounds last year. IPO volumes are just $31 billion so far this year, a fraction of the amount raised by the same point last year.

Global Lull
Quarterly IPO volumes around the world have been falling
Source: Bloomberg

In Hong Kong, bankers are increasingly relying on cornerstone investors -- large shareholders that typically agree to hold on to the stock for a set period in exchange for early and guaranteed allocation. Such buyers help to signal demand for an offering and attract other investors.

Way Down
Hong Kong IPO volumes are picking up from the first quarter, the slowest since 2012, but remain low
Source: Bloomberg

The territory's two largest IPOs this year, China Zheshang Bank's HK$15 billion sale and a HK$7.7 billion issue by Bank of Tianjin, both in March, saw an unusually large amount taken up by cornerstone investors.

Bankers have also resorted to stressing the first-of-a-kind nature of some deals as a marketing hook. Yadea is the first e-bike maker to list, while BOC Aviation is Asia's largest airline leasing company and the first to go public in Hong Kong.

In a low-yield world, the lessor's ability to lock in long-term cash flows should ensure plenty of interest. Still, pricing of 1.1 times book -- the level at which cornerstone investors such as Boeing and sovereign wealth fund China Investment Corp . have bought in -- may be ambitious. That's a premium to bigger, U.S.-listed peer AerCap, which trades at 0.9 times. Moreover, as Gadfly's David Fickling points out, BOC Aviation's dependence on Southeast Asia's slowing travel market doesn't make it the China travel play it first appears to be.

BOC Aviation, whose shares are due to start trading on June 1, also throws up a potential hurdle for future IPOs. Chinese state-owned companies can't sell stock for less than book value, and as the first to list, Bank of China's aircraft-leasing unit has set a benchmark. That leaves a narrow pricing window of between 1 and 1.1 times book for upcoming offers by CDB Leasing, part of policy lender China Development Bank, and Minsheng Leasing, a unit of the eponymous Chinese bank. 

A further sign of the tepid demand for Hong Kong IPOs is the downsizing of China Merchants Securities' offering. The brokerage, which already trades in Shanghai, filed listing documents with the city's exchange this week and aims to raise $2 billion -- less than half the amount it planned to seek last year, when China's stock markets were booming.

The one promising sign on the horizon is the potential float of a leviathan: Postal Savings Bank of China. The lender is the nation's biggest bank by branches and will be a must-have stock for most portfolios, fund managers say, even amid concerns over increasing non-performing loans in China.

Barring an unexpected reversal in investor sentiment, it's hard to see things rebounding soon. The city's benchmark Hang Seng Index has fallen 10 percent this year and worries over China's economy continue to deepen. In these conditions, it's tough enough to get people to buy tried and tested stocks, let alone new companies.

Hong Kong can put its IPO crown back in the drawer -- it won't be needing it for quite a while, if ever.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net