A China-Charged Bull Market for IPOs in Hong Kong

After the collapse of Lehman Brothers a year ago, things were looking grim for American gambling tycoons Steve Wynn and Sheldon Adelson. The two had expanded into Macao, China's gambling hub, just as the Chinese economy was slowing and Beijing was tightening rules on travel to Macao in a bid to fight money laundering. That meant fewer Chinese were able to gamble at casinos owned by Wynn Resorts (WYNN) and Adelson's Las Vegas Sands (LVS).

How much brighter is the picture now? With the Chinese economy surging, Macao's gambling revenues jumped 17% in August year-on-year, according to brokerage CLSA. "Revenue growth should be explosive in the last four months of this year," says Aaron Fischer, a CLSA gaming analyst. "Companies have reduced costs so we will see a huge rebound in earnings."

Confident the bad times are over, both Wynn and Adelson hope to offer shares in their Macao operations. Wynn Resorts plans to sell a 25% stake in the operator of its Macao hotels and casinos, Reuters reported on Sept. 20. The initial public offering in Hong Kong is expected to start trading on Oct. 9, raising as much as $1.6 billion. Adelson, meanwhile, in July said that by yearend he'd like to raise some $4 billion from an IPO for the Macao operations of Las Vegas Sands, but no date has been announced.

What's true for Macao-based casinos is true for many other China-focused companies. After a long drought when Hong Kong's legions of bankers, lawyers, and accountants who specialize in IPOs had little to do, there's a surge of interest in listings. Metallurgical Corp. of China raised $2.3 billion last week, while Sinopharm Group, China's largest drug distributor, pulled in $1.2 billion. (Trading has not yet started for the two companies' stocks.) And Chinese real estate developer Glorious Property aims to get $1.5 billion when it begins trading in early October. "We're running as fast as we can," says Jason Cox, head of Asia-Pacific equity capital markets at Bank of America Merrill Lynch. "People are definitely in overdrive."

'09 Asian Issuances Could Raise $100 Billion While most of the excitement is in Hong Kong, other Asian markets are getting attention, too. Maxis Communications, the largest cellular operator in Malaysia, plans to offer 30% of the company for as much as $2 billion. Shanghai-based online game operator Shanda Interactive (SNDA) plans to spin off its subsidiary Shanda Games in an IPO on the Nasdaq. All told, some $30 billion to $35 billion will be raised in Hong Kong IPOs by yearend, largely by mainland Chinese companies, estimates Gokul Laroia, co-head of investment banking for Asia Pacific at Morgan Stanley (MS). Across Asia, there will be about $100 billion raised through new listings, rights offerings and follow-on deals this year, double last year's level, he reckons.

What explains the surge in dealmaking? Investors believe the recession in the U.S. is finally over. And they're upbeat about China's nearly $600 billion in stimulus spending and $1.2 trillion in bank lending, which have benefited infrastructure companies and consumer goods makers. Imports from Australia and Indonesia, traditional suppliers of raw materials for mainland factories, were up by 10%-plus in June, a sign that manufacturers expect a recovery in orders. And a survey by MasterCard Worldwide (MA) found 41% of Chinese urban households expect to increase spending in the next 12 months. That's about twice the number of a year ago, says Yu Wa Hedrick-Wong, economic adviser to MasterCard. "For China to maintain its high economic growth, it has to find demand from within," he says.

Still, executives looking to climb aboard the IPO train might need to move fast. China's leaders are giving some signs they're increasingly confident about the recovery and therefore more willing to end the expansionary policies that have fueled it. Jun Ma, economist with Deutsche Bank (DB) in Hong Kong, points to recent comments by Chinese Premier Wen Jiabao about the risk of inflation. That statement "is an important indication…that inflation will become a key trigger for the government to exit from the expansionary monetary and fiscal policy," Ma wrote in a Sept. 18 report.

With economists such as Ma saying China's recovery may not have legs, the longevity of the IPO revival in Hong Kong could be in doubt. "People are getting overexcited because there's been such a dearth [of deals]," says Simon Aird, managing director in the capital markets department at Credit Suisse (CS), who points out that part of the current flurry is due to the backlog of delayed deals and that only the best companies are tapping the markets. Is the Hong Kong market back to its lofty 2007 days? "No," says Aird. "We're still flying economy class."

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