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How to conduct an IPO in volatile markets: keep it small and conference call investors

Georgina Lee georgina.lee@scmp.com

Xingye Wulian Service, a Henan-based property company, celebrated its HK$200 million (US$25 million) listing in Hong Kong on March 9 after road-testing a new way of gathering investors: over the internet.

Traditionally, IPO underwriters and the company's management make a series of pit stops in financial hubs from New York to Tokyo, pitching the deal to potential investors. During the coronavirus epidemic, companies have switched to making presentations online and via teleconferencing.

Chinese companies have had to adapt earlier than others during the new coronavirus outbreak. So far, they have found that internet roadshows, keeping the IPO relatively small, and bringing in large, anchor investors help them get the deal over the finish line.

Many of these Chinese companies list in Hong Kong, the world's biggest IPO market last year. They may have valuable lessons to offer other market debutantes around the world and point to the new normal for IPO bankers and investors.

The total funds raised in Hong Kong for January and February are down 16 per cent year on year. Photo: Bloomberg alt=The total funds raised in Hong Kong for January and February are down 16 per cent year on year. Photo: Bloomberg

"If the coronavirus drags on, and travel bans and quarantine measures are not lifted soon we would likely continue with using internet roadshow for other issuers we are helping to list," said Han Dong, at Hong Kong-based brokerage Zhongtai International which advised the property company.

Will Akers, senior vice-president for Asia-Pacific at NetRoadshow, a provider of internet roadshows for equities and bond offerings, said his company has seen a 50 per cent year-on-year jump in Asia Pacific revenue in January and February.

The revenue growth was driven by small to medium-sized Chinese banks and brokerages pitching IPOs by Chinese companies to global investors.

Hong Kong's IPO engine stalls as outbreak keeps deal makers at home

Small is definitely beautiful for Hong Kong IPOs so far this year.

Data from the Hong Kong Exchanges & Clearing shows that for the first two months this year, total funds raised by IPOs dropped by 16 per cent to HK$9.24 billion, from HK$11.01 billion a year ago.

As of March 9, there were only six deals that raised over HK$500 million (US$64.4 million) among the 25 IPOs that have been completed. The biggest deal year-to-date was the HK$2.53 billion (US$325.6 million) raised by restaurant chain operator Jiumaojiu International, which was listed in January.

Edward Au at Deloitte China said issuers and bankers for larger IPOs, particularly those from the most affected sectors such as catering, food and beverage, hospitality, travel and leisure, have held back from launching deals.

Some processes must still be conducted physically by intermediaries.

"IPO sponsors, lawyers still need to conduct due diligence on the issuer on-site to inspect original documents. Auditors still need to collect the relevant audit evidence from company's inspect them on site," said Au.

In terms of new business, another banker, who sought anonymity, also said winning an IPO mandate is still a relationship business, especially when several banks are competing for a sizeable US$1 billion IPO deal from a prospective issuer.

For deals already in motion, cornerstone investors are backing smaller deals.

Cornerstone investors are usually sizeable financial institutions or well-known individuals to whom IPO shares are allocated at the IPO price before the deal opening for subscription. Their support helps ensure that there is enough demand for a company's shares, and serves to vouch for the quality of the new issuance.

Among the 25 deals that have listed year-to-date, nine of them have enlisted the support of cornerstone investors, according to data from Refinitiv. Cornerstone investors are usually subject to a six-month lock-up period after listing and act as an anchor of support during times of market volatility. Jiumaojiu, for example, had support from BlackRock Funds and China Alpha among others.

Zhongguancun Science-Tech Leasing, which raised HK$506.7 million and listed in January, had financial software developer and IT firm Yusys Technologies, and United Crystal, a unit of Hong Kong-listed Beijing Enterprises Water Group, as anchor investors.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.