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Public Goes Missing From Hong Kong IPOs as State Giants Buy

Updated on
  • Cornerstone investors are taking a bigger proportion of deals
  • Market faces test with $6 billion of IPOs planned by year-end

Companies in Hong Kong are increasingly leaving the public out of their initial public offerings.

Bigger slices of the city’s stock sales are instead going to cornerstone investors, who commit to purchasing shares before they become more widely available. Such buyers have plowed an unprecedented $9.1 billion into large IPOs in the city this year, twice breaking records for the proportion of the offerings they secured. China Huarong Asset Management Co., the nation’s biggest bad-loan manager, sold 70 percent of its $2.3 billion IPO to cornerstones last month, the highest ratio among billion dollar-plus Hong Kong deals in the past decade.

The trend is explained in large part by the role of China’s state-owned companies, who lock-in IPO investments from other government-run firms to ensure their Hong Kong offerings are successful. While the deals have helped put the city’s IPO fundraising on pace for the best year since 2010, critics say they’re a symptom of weak investor demand and risk undermining the market discipline that comes from having non-state shareholders.

“There’s a lack of diversity in their investor base,” said Francis Lun, the chief executive officer of Hong Kong brokerage Geo Securities Ltd. “The Chinese companies are trying to line up as many cornerstones as possible because they lack confidence” in getting the deals done without them, he said.

China’s government-owned enterprises have dominated both the buy side and the sell side of Hong Kong IPOs this year. State sellers accounted for 77 percent of the $19.3 billion in proceeds from deals above $1 billion, while government buyers comprised 62 percent of the cornerstone shares. Companies raised a total of $26.4 billion in Hong Kong this year, the highest 11-month tally since 2010.

Cornerstone investors this year included China General Nuclear Power Corp., which invested $50 million in China Huarong, and the state-run Xinhua News Agency, which bought a $50 million stake in China International Capital Corp. ahead of its trading debut in Hong Kong this week.

Hong Kong’s IPO market will face a further test in coming weeks, with companies led by China Energy Engineering Corp., a state-owned power plant builder, planning to sell more than $6 billion of shares by year-end, according to people with knowledge of the matter.

The listing candidates include three Chinese lenders -- Bank of Jinzhou Co., Bank of Qingdao Co. and Bank of Zhengzhou Co. -- that aim to raise more than $500 million apiece, people with knowledge of the matter said, asking not to be identified as the information is private. They will have to compete for investors’ attention with the more than 30 other Chinese financial institutions already listed in Hong Kong, almost half of which trade below the reported value of their net assets.

First-time share sales in the Chinese financial industry this year have fallen an average 9.7 percent from their offer prices in Hong Kong, after adjusting for deal size. Huarong is unchanged since its Oct. 30 listing, after briefly dropping below its IPO price on its third day of trading. The benchmark Hang Seng Index fell 2.15 percent at the close on Friday, extending this year’s retreat to 5.1 percent.

Representatives for Bank of Jinzhou, Bank of Qingdao, Bank of Zhengzhou and China Energy Engineering declined to comment on their IPO plans.

“The Chinese cornerstones enable these deals to get covered, but they certainly do not help the after-market,” said Philippe Espinasse, the former head of Asia equity capital markets at Nomura Holdings Inc. and author of “IPO: A Global Guide.” “Large cornerstone tranches are first and foremost a sign that market conditions are still somewhat shaky.”

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