PRINT THIS PAGE Chosen18/01/2006. Source: Asia Private Equity Review (APER).
Hong Kong has firmly established its position as the bourse for Chinese companies and a principal exit route for private equity investors, says the Asia Private Equity Review. A week before Christmas, the Hong Kong government had very little to rejoice over in its efforts to introduce Bejing's democracy blueprint.
By a majority margin, the territory's lawmakers rejected China's latest democracy blueprint for Hong Kong. Earlier in the month, the former colony of the British government witnessed one of its largest public pro-democracy demonstrations in recent years. Despite the chasm of understanding in political reform between Hong Kong and its master in the north, Beijing has chosen Hong Kong's financial market as one of its crucial platforms for the country's overall economic reforms. In late December, the Assets Supervision and Administration Commission reiterated its earlier plans to have more state-owned enterprises to seek listing on the Hong Kong bourse.
Established in 2003, the state-owned body acts on behalf of the central government with the aim to strengthen the management of state-owned assets. It is eager to introduce corporate governance standards to the state behemoths so that the latter can effectively compete on the international scene. The Assets Supervision and Administration Commission's overall plan is to enlist the Hong Kong Stock Exchange ('HKSE') as the state-owned enterprises' first public listing platform before their return to the domestic market.
The Favourite
With China's stock market recording its fourth consecutive year of loss, Hong Kong is uniquely positioned as the platform for Chinese companies to seek international institutional investors' capital while understanding global institutions' requirements. In the past two years, the Hong Kong stock market has not only established itself as the capital raising destination for Chinese companies but also the principal divestment route for all those private equity investors' that have earlier parked their capital with China-based companies.
In the 24 months ending December 2005, 51 Chinese companies are known to have entered into the divestment process for their existing investors, of which 38 or 74.5% took the public listing route, with bourses in Hong Kong, Singapore or USA being the chosen destinations. Hong Kong is the clear favourite as over 55% of these 38 companies have decided to make their debut on the Hong Kong bourse, with NASDAQ and New York Stock Exchanges being the next most-favoured stock markets, attracting 14 or 37% of the aggregate, while Singapore Exchange Ltd ('SGX') succeeded in enlisting the remaining three (fig.11).
The stock market boom in both 2004 and 2005 has fuelled a strong appetite for public listing. In both years, the number of companies backed by private equity investors that sought to raise funds from international investors is virtually identical, capturing 19 each year. Among the three bourses that attracted these 38 companies, the HKSE is the sole market that boasts an increase, from 10 in 2004 to 11 in 2005, while the US managed to maintain its position in enlisting seven companies each year. But the SGX's position has slipped. It registered only one in 2005, compared to two in the preceding year (fig.12).
In terms of valuations, international investors were by far the most conservative in placing values on Chinese companies in Hong Kong, even for those that have received funds from private equity investors. In the 24 months ending December 2005, the highest valuation that investors were prepared to pay was 32 times the current earnings of the company.
This compares to a lofty 1,694 multiple for Baidu.com. Even on the SGX, investors were prepared to pay a multiple of as much as 57 times. Yet it is the strong after-market performance that propels the HKSE as Chinese companies' favourite listing destination. For the period under survey, listed Chinese companies with private equity investors in their original shareholder structure outperformed their relevant index by an average 22.5%. Those on NASDAQ were less successful, out performing the NASDAQ Composite Index on average by 3.2%.
For the three companies listed on SGX, all have been trading well below the Strait Times Index. One company has underperformed the index by as much as 85.2% over the comparable period (fig.13).
The HKSE also has an added advantage. Unlike the NASDAQ which is predominantly for technology plays, the Hong Kong bourse appeals to non-technology stocks as well as evidenced by the outstanding performances of the three best performers which made their respective debuts in 2004. A year after Fu Ji Food and Catering Services went public, at the end of December, its share price had jumped by 319.4%. Li Ning Company Ltd., a sportswear manufacturer and distributor, registered a gain of 162.8%, compared to its offer price of HK$2.15 (US$0.28) in June 2004. China Mengniu Dairy is another example.
Although its private equity investors have all disposed of their shares, the Heilongjiang-based dairy company's share price continues to be on an ascending path 18 months since it first acquired an address on the Hong Kong bourse. At the beginning of January, China Mengniu Dairy's shares were changing hands at HK$7.30 apiece, nearly double its offer price of HK$3.925. The fact that these three companies have been listed on HKSE for more than a year and are trading well above their relevant index speaks volumes about the market liquidity as well as HKSE's investors' in-depth knowledge of the fundamentals of China companies (fig.14).
The Competition
Yet the competition for institutional capital is fierce. While the Hong Kong bourse won the race of claiming five of the best performing private equity-backed Chinese companies that were listed in 2004, it failed to maintain the illustrious record in 2005. In 2004, seven of the ten companies listed on the HKSE have outperformed their applicable index, but in 2005, the magic faltered. Of the 11 companies listed on the HKSE, the shares of less than half traded above their relevant index. It was NASDAQ that stole the show. In the past 12 months, two of the three best performers were listed on the world's largest exchange for technology companies. Baidu.com which mesmerised NASDAQ at the time of its debut was trading at US$66.30 at the beginning of January, maintaining an impressive 145.6% increase from its offer price of US$27. Focus Media's share prices closed at US$35.98 at the beginning of January, a 111.6% increase compared to its offer price of US$17 apiece. AAC Acoustic, listed on HKSE, came in third in registering an 88.6% gain, compared to its offer price of HK$2.73 (fig.15).
Observation
Despite China's vast and magnetic appeal, there are clear indications that investors can afford to abstain from buying Sino stocks. In the weeks that followed the colossal listing of China Construction Bank that raised over US$8 billion, investors were displaying lethargic responses to public offerings from companies in the Middle Kingdom. Virtually all listings with private equity backgrounds failed to record an exhilarating debut. In Singapore, China Coking Co. which received a small sum of capital from PrimePartners Asset Management, had to postpone its public offer. For the Hong Kong bourse to sustain its ability to attract investors' continued interest, perhaps focusing its appeal to non-technology stock is an astute move.
In the first two weeks of December, two companies, Minth Group and Dongfeng Motors Group which had earlier received funds from private equity investors, both made gains on their respective first day of trading, with shares of Minth Group soaring by more than 42.2%. As increasing number of stock markets around the globe court China stocks, institutional investors have clearly expressed HKSE's mandate.
Editor's Notes:
Indices used to benchmarking performances of listed Chinese companies:-Hong Kong: Hang Seng China Enterprises Index, Hang Seng China-Affiliated Corporations Index, GEM Index are used as companies fall into different categories USA: NASDAQ Composite Index and Dow Jones Industrial Average Singapore: Strait Times Index.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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