Hong Kong IPO cornerstone habit is out of control

Bank of Tianjin Co

22/06/2016 05:17

(The author is a Reuters Breakingviews columnist.  The opinions 
expressed are her own.) 
    By Una Galani 
    HONG KONG, June 22 (Reuters Breakingviews) - Hong Kong needs 
to kick its addiction to cornerstone investors. The territory's 
habit of pre-selling a big chunk of new listings is out of 
control. In the latest egregious example, China Development 
Bank's leasing unit will hand at least 70 percent of its nearly 
$1 billion offering to friendly investors. The practice distorts 
prices and hurts liquidity. 
    Like many vices, cornerstones are the product of good 
intentions. Underwriters would sign up a few large, high-quality 
investors before an initial public offering to help underpin a 
company's value. These days, however, cornerstones tend to be 
large "friends and family" investors - typically Chinese buyers 
- that prop up an artificially high valuation. One reason is 
that Chinese government-backed companies face pressure not to 
sell their shares for less than book value. 
    The statistics are alarming. Hong Kong's ten biggest initial 
public offerings sucked in $16 billion over the past twelve 
months, accounting for more than half of the total raised in the 
territory. In all but one of those deals, cornerstone investors 
bought at least half of the stock on offer. 
    The resulting high values are one reason why Hong Kong IPOs 
tend to trade poorly in the secondary market. Shares in the 
three biggest listings so far in 2016 - China Zheshang Bank 
 2016.HK , Bank of Tianjin  1578.HK  and BOC Aviation  2588.HK  
- have all underperformed the Hang Seng benchmark index. 
    Lack of liquidity is another concern. The investors that 
come in ahead of an IPO typically cannot sell their shares for 
at least six months, leaving less stock available for public 
trading.  
    China Development Bank Financial Leasing is an extreme 
example. Six investors have committed to buy shares worth $680 
million. At the low end of the published price range, this would 
represent 90 percent of the shares on offer, meaning just 10 
percent of the company will initially be available via the 
public market. That is well below the 25 percent minimum free 
float that Hong Kong typically requires of listed companies. 
    Tweaking the rule that requires a minimum free float to 
include shares that are subject to a lockup could be one way to 
deal with the problem. But the longer Hong Kong ignores the 
problem, the more its reputation as a modern and transparent 
capital market will suffer. 
 
    On Twitter https://twitter.com/ugalani 
     
    CONTEXT NEWS 
    - China Development Bank Financial Leasing is planning to 
raise up to $978 million through a Hong Kong initial public 
offering, according to a term sheet seen by Reuters 
Breakingviews.  
    - The company has set a price range of HK$1.90 to HK$2.45 
per share. The price represents a ratio of 0.93-1.13 times its 
2016 book value, IFR reported on June 20.  
    - Six cornerstone investors are committing $680 million to 
the offering. The investors are Three Gorges Capital, China Re, 
Hengjian International, Fortune Eris, BOCGI, and CCCC 
International. 
    - At the top end of the price range, the cornerstone 
investors would account for at least 70 percent of the offering. 
    - China Development Bank filing (prices redacted): http://bit.ly/28Na5Pb 
    - Reuters: CDB Leasing seeks up to $980 mln in Hong Kong IPO 
- IFR  urn:newsml:reuters.com:*:nH9N18000N 
     
    RELATED COLUMNS 
    Cornering the market  urn:newsml:reuters.com:*:nL3N12F1NO 
    Fundraising harbour  urn:newsml:reuters.com:*:nL3N13T1BI 
     
     
    - For previous columns by the author, Reuters customers can 
click on  GALANI/    
 
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 (Editing by Peter Thal Larsen and Kathy Gao) 
 ((una.galani@thomsonreuters.com;  Reuters Messaging: 
una.galani.thomsonreuters.com@reuters.net)) 
 
Keywords: CDB LEASING IPO/BREAKINGVIEWS