Fee bonanza on China's STAR Market IPOs passes by Western banks

China Securities Co

15/09/2020 06:45

* STAR Market fees averaging nearly 6%, more than Nasdaq
-Dealogic
    * Western banks have limited presence in China securities
market
    * STAR's co-investment rules heighten sponsor risk
    * Ant Group to raise more in STAR IPO than in Hong Kong
-sources

    By Scott Murdoch and Samuel Shen
    HONG KONG, Sept 15 (Reuters) - A fee bonanza on China's
Nasdaq-style STAR Market, which is set to surge with Ant Group's
mega-listing, is passing Western banks by due to their limited
local presence and worries about a unique co-investment rule for
managing IPOs.
    Chinese financial technology giant Ant plans to raise more
funds on the year-old STAR than in Hong Kong as part of its up
to $30 billion dual-listing, sources have told Reuters.
 urn:newsml:reuters.com:*:nL8N2FZ081
    Regulators dictate lead underwriters for STAR IPOs must buy
2% to 5% of stock on sale and hold it for two years, which
bankers and analysts said is risky in volatile financial markets
and at a time when many banks face capital pressure.
    Companies raised $10.3 billion via initial public offerings
(IPOs) over January-July on the STAR Market, making it the
second-biggest market globally, showed Refinitiv data, behind
Nasdaq but ahead of Shanghai's main board and Hong Kong.
    "That's a lot of risk you're holding and that can either
work out very well or not," said an investment banker at a U.S.
firm in Hong Kong when asked about the co-investing requirement.
    The co-investment rules are aimed at discouraging
underwriters from setting IPO prices too high as they need to
put some of their money at stake, said the China Securities
Regulatory Commission when the STAR Market was launched in 2019.
    For the STAR tranche of Ant's IPO, China International
Capital Corp Ltd  3908.HK  and China Securities Co Ltd  6066.HK 
are sponsors - the most senior role in an IPO.
    Not all Western banks have Chinese underwriting licences,
and they struggle to compete with local rivals due to limited
securities distribution networks. This could change as China
opens up its financial sector, allowing for expansion.
    "Chinese banks have led the majority of deals to date
although we are beginning to see increased participation from
international banks on certain deals," said analyst Alex Owen at
banking data provider Coalition.
    
    LUCRATIVE FEES
    All but three of the STAR Market's 177 listings - raising
$38 billion - have been led by mainland Chinese banks.
    UBS Group AG  UBSG.S  is the only Western bank to be sole
sponsor when it led a $224 million listing in October. Zhong De,
a venture between Deutsche Bank AG  DBKGn.DE  and Shanxi
Securities Co Ltd  002500.SZ , was sole sponsor of two deals
last year.
    For those underwriters willing to take the risk, rewards
could be lucrative.
    Equity offerings at the STAR Market have paid an average of
nearly 6% in fees to investment banks in the year since
launching, showed Dealogic figures, versus 5.3% for Nasdaq and
just 2.4% for Hong Kong.
    The global average for IPO fees so far in 2020, said
Dealogic, is 4%.
    STAR's higher fees reflects challenges Chinese bankers face
in pricing innovative tech start-ups under a revamped IPO
system, analysts said.
    Before STAR, regulators capped IPO prices, which, analysts
said, made bankers' jobs less complicated.
    "Bankers need to set prices themselves, have more expertise,
and shoulder more responsibility, so naturally, the fee ratio is
higher," said analyst Li Xingjin at Capital Securities in
Beijing.

 (Reporting by Scott Murdoch in Hong Kong and Samuel Shen in
Shangai; Editing by Sumeet Chatterjee and Christopher Cushing)
 ((Scott.Murdoch@thomsonreuters.com;))