Asia Bankers Expect IPO Revival as Stock Swings Ease

July 2 (Bloomberg) -- Asian initial public offerings, which accounted for the lowest proportion of share sales in at least 10 years during the first half, may be poised to take off as smaller stock swings make it easier for companies to tap equity markets.

IPOs made up 10 percent of the $33 billion of stock offerings in Asia, excluding Japan and mainland China, according to data compiled by Bloomberg. The decline in IPOs occurred as investors sold stakes in Chinese banks and financial companies raised funds in rights offerings, more than tripling the overall value of equity sales from the second half of 2008.

Stock-market gyrations that made it harder for companies to complete IPOs are easing, said bankers, including Justin Haik at Morgan Stanley in Hong Kong. The benchmark for U.S. stock market volatility closed June 29 below where it was just before Lehman Brothers Holdings Inc. filed for bankruptcy Sept. 15.

“The IPO market will start to get pretty active,” said Kester Ng, Asia-Pacific head of equity capital and derivatives markets at JPMorgan Chase & Co. in Hong Kong. “A lot of companies that put IPOs on the shelf for the last 18 months have started working.”

The Chicago Board Options Exchange Volatility Index, which measures the cost to insure against losses in the Standard & Poor’s 500 Index, dropped 67 percent through June 30 from a Nov. 20 peak. A measure of the volatility of the MSCI Asia Pacific Index has fallen to the lowest since Sept. 4, according to Bloomberg data.

Billion-Dollar Deals

IPOs in Asia outside Japan dwindled to $3.36 billion in the six months ended June 30 from $14.3 billion a year earlier, the slowest half since 2003, Bloomberg data show.

As many as 100 companies may be reviving Hong Kong IPO plans after the equities rout delayed sales scheduled for 2008, said Jonathan Penkin, Goldman Sachs Group Inc.’s Hong Kong-based head of equity capital markets in Asia outside Japan. The city was the largest IPO market in the region.

Haik, a managing director in Morgan Stanley’s global capital markets group, expects at least five IPOs worth more than $1 billion each in Asia during the next six to 12 months. China Zhongwang Holdings Ltd.’s $1.3 billion sale in April was the only one to surpass that mark in the first half.

American International Group Inc.’s Asian life insurance unit may raise as much as $8 billion in an IPO during next year’s first quarter.

IPOs in Hong Kong and China may raise $39 billion in 2009, accounting firm Ernst & Young LLP said last month. China’s securities regulator lifted a moratorium last month on public offerings, after the benchmark Shanghai Composite Index climbed more than 40 percent in the first five months. Overseas investors are restricted from buying shares in mainland China.

Bank Sell-off

Shareholders, including Goldman Sachs, Bank of America Corp., UBS AG and Royal Bank of Scotland Group Plc, sold a combined $10.8 billion worth of stock in Bank of China Ltd., China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd. in the period, increasing the value of deals.

U.S. and European banks, which initially bought into the Chinese lenders in 2005 and 2006, rushed to sell after lockup periods on their holdings expired, helping them restore finances hobbled by credit market losses.

“People needed to repair balance sheets,” said Steve Barg, Asia head of global capital markets at UBS in Hong Kong.

The sales attracted hedge fund and mutual fund managers that boosted cash holdings late last year in preparation for investor redemptions that didn’t materialize, Barg said.

Chinese Buyers

Last year’s equities rout thinned the ranks of private banks and Hong Kong billionaires buying IPOs. Private banks representing wealthy individuals are less willing to buy new shares than they were in 2006 and 2007, when booming markets drove stock offerings in Asia to records, said JPMorgan’s Ng.

Chinese investors are playing a bigger role, said Jason Cox, Hong Kong-based head of Asia-Pacific equity capital markets at Bank of America Merrill Lynch. In Hong Kong, Chinese funds and companies account for as much as 30 percent of institutional orders for IPOs, up from less than 10 percent in 2006, he said.

Lower price expectations among companies mulling IPOs may draw more investors to sales, said Goldman’s Penkin.

361 Degrees International Ltd., a Chinese maker and distributor of sportswear, priced a $233 million IPO in Hong Kong last month at 8.7 times estimated profit for the year to June 2010. Anta Sports Products Ltd., which competes against 361 Degrees, trades at 16 times estimated 2010 earnings, according to Bloomberg data. Anta Sports went public in July 2007.

“Issuers’ expectations on price have come down from what it was last year,” Penkin said. “The valuation gap has closed a little.”

Stock swings posed another complication earlier this year for investment bankers who were trying to value companies about to go public, Haik said.

“If you catch the wrong week, all of a sudden you can end up having launched the deal at this price, yet the comparable companies have dropped 20 to 30 percent,” he said. “The company you are trying to IPO all of sudden looks expensive relative to the peer group.”