With Chinese stocks among the world’s hottest investment plays, there is a frantic struggle between European and US investment banks to structure deals that feed a hungry global investment community.
In this climate one of the most important arenas of competition is whether a Chinese company needs to have an ADR to attract American pools of capital. The rule of thumb is that any IPO over $250 mn needs an ADR due to the size factor. But this theory is being tested by many non-American investment banks eager to avoid DR structures.
Despite some negative publicity surrounding the effectiveness of DRs, there have been some impressive deals coming to market from China. Notably, the $280 mn China Eastern IPO re-opened the DR market for H-Shares (mainland-controlled but Hong Kong-listed enterprises) early in 1997. And that issue was followed by Yanhua Petrochemical in June and China Southern in July. Other DRs in the offing include Yanzhou Coal Mine expected later in the summer or early fall.
The one disappointment has been the $451 mn dual listing for Beijing Datang Power. Though Datang was listed on the London Stock Exchange, the company was talked out of a DR structure by its bankers. Nor have the high-performing red chip stocks chosen to go with DR structures for the most part. Due to their lower offering size, a tremendous appetite for red chip issues, and the need to get their issues out before Hong Kong’s handover, many red chips decided to forego the DR route and associated compliance.
When looking at the question of overseas listings, bankers tend to note the case of Huaneng Power International. The largest issue ever floated by the PRC at $625 mn, HPI came to market with N-Shares, an ADR structure also used by Shandong Power. These shares were solely listed in New York and both power companies have had a hard time generating liquidity and interest in the US capital market.
It has been rumored HPI may be headed back to Hong Kong for a reverse listing. And, European underwriters may have leveraged off the bad publicity of the two-Huanengs to dissuade Datang from using the DR structure.
Francis Leung, managing director of Peregrine Investments Holdings, notes that PRC companies find it hard to get a response in New York. Four companies have completed dual listings on Hong Kong and New York, and most trading tends to takes place on the HKSE. Leung points out that the liquidity is in a market that knows what is happening in China.
‘Some people have a misconception about the Hong Kong market,’ he says. ‘They feel companies receive better PE ratios from New York. Over time, the PEs of HKSE-listed companies will be higher than NYSE-listed companies. Today the PEs of red chips are higher than the average HKSE PE.’
Michiel Steenman, director of ABN-Amro Rothschild, adds, ‘If you analyze all these deals, there is only one conclusion you can draw. The most important group of investors is based in Asia. The rest are an added plus. You do not need a US listing or an ADR to get the attention of Fidelity anymore. If you need to go to the US you can reach 99 percent of your target investors by going through the Rule 144a route. In the end, if these issues do not fly in Hong Kong, they will not fly anywhere.’
Steenman notes that liquidity for PRC instruments is growing, especially in terms of institutional involvement. Money is pouring in from the US; Hong Kong is in the process of setting up pension funds; and China is thinking about bringing pension funds into the picture as well. In response to these potential capital flows, names like Citic Pacific are maturing along with the market. At the end of the 1980s, Citic Pacific was just formed. Today it is considered to be a natural buy as a Hong Kong blue chip for many institutions.
Steenman feels the only real benefit of an NYSE listing is accessing the US middle market or retail investors. However, as he points out, these investors are speculative and are not going to be the price leaders in any issue. The case against a US listing grows when companies discover they must in turn comply with US requirements. ‘We will continue to see dual listings,’ adds Steenman. ‘PRC regulators want to keep their options open, but now they realize that Hong Kong is the primary venue.’
The biggest vote for NYSE-listings comes from US investment banks. They feel that while Hong Kong is the market for research and liquidity, one cannot discount the pulling power of the largest capital pool. ‘Dual listings make great sense when there are comparable companies in the US market,’ says James Chandler, director of equity markets at Merrill Lynch. ‘We are not firm believers in a sole US listing, but when you are a company like Shanghai Petrochemical, the benefits of listing in the US, where people understand the sector, are manifold.’
