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Investors remain upbeat on Asian IPOs

Region provides safe haven as global uncertainties dampen volume

Both mainland China and Hong Kong IPO markets are expected to remain positive.   © Reuters

SINGAPORE -- Despite the lackluster performance of the global IPO market with investors lukewarm to even mega unicorn offerings, sentiment in some Asian markets remain strong.

Take China for instance. Since the launch of its new Nasdaq-style stock venue (STAR Market) last month, 25 companies raised a total of $5.4 billion, about 20% more than expected as retail investors flocked to the market.

And, that's not all. Despite the unrest in Hong Kong, all eyes in the financial market are glued on the upcoming IPO of e-commerce behemoth Alibaba Group Holding. Experts said that the online retail giant led by Jack Ma could possibly raise billions in its IPO planned for this year.

According to Ernst & Young, the Asia-Pacific region dominated global IPO activity in 2019. This was despite ongoing trade tensions between China and the U.S. hitting markets and hampering a return to 2018 levels.

"By proceeds, the region accounted for three of the top 10 exchanges. Asia-Pacific's main markets experienced average first-day returns of around 19% and average current returns of 34%, illustrating that IPO performance continues to elevate IPO investor sentiment," said EY in its latest second-quarter 2019 Global IPO Trends report.

IPO activity in the region in the first half of this year was down 12% by volume (266 IPOs) and 27% by proceeds ($22.3 billion), compared with the same period last year.

In its report, EY noted that despite volumes and proceeds coming in lower in the first half of this year, positive investor sentiment and a healthy IPO pipeline suggest that activity in the region will pick up in the second half.

Thailand, for instance, is also likely to see an upswing in terms of listings, with furniture retailer Index Living Mall making a debut last month.

Aequitas Research's weekly IPO roundup released on Aug. 3 said that although Index Living Mall's stock price struggled to hold above its listing level of 22 baht ($0.71), it is unlikely to deter larger companies from coming to market. Some of the upcoming IPOs in the pipeline include those of Central Group's department store unit Asset World Corp. and Singha Hotel and Resorts, among others.

In the April-June period, markets in the Association of Southeast Asian Nations saw a notable increase in deal numbers (29 IPOs marking a 53% rise) over the first quarter of 2019 and a significant boost in proceeds ($1.7 billion for a 447% rise). The Singapore stock exchange ranked 10th among global exchanges by proceeds in the second quarter of 2019 due to two sizable real estate investment trust IPOs.

Key sectors that are expected to remain active and garner investor interest include technology, media and entertainment "as companies from these sectors are expected to drive the IPO markets in APAC for the rest of 2019," according to EY.

However, for traditional sectors such as industrials and natural resources, investors might continue to limit their short-term exposure due to U.S.-China trade tensions while remaining focused on valuations and post-IPO performance.

Both mainland Chinese and Hong Kong IPO markets are expected to remain positive. For mainland Chinese IPO markets, activity in the second half of 2019 is likely to be driven by the STAR Market.

Some of the listed companies in Hong Kong such as China Railway Signal & Communications have chosen to list on the STAR market as well, and their IPOs performed relatively well upon debut.

CRSC sold shares in its IPO at 5.85 yuan per share ($0.83) on July 5, when the Hong-Kong traded price was at 6.10 Hong Kong dollars ($1.08) per share. At current exchange rates, the shares were sold in the IPO at a 9% premium to the Hong Kong-listed shares.

Experts said that the strong debuts for companies such as CRSC could prompt more companies to take up listing on the STAR market, thus opening up for more arbitrage opportunities.

Brian Freitas, a Smartkarma Insight provider, noted that there could also be a potential inclusion of the STAR Market in the MSCI Global Investable Market Indexes as the new exchange has introduced new features such as registration-based IPO system, increased reporting transparency, listing of dual-class shares and relaxed daily trading limits. However, MSCI said more time is needed to monitor and assess the implementation, trading and liquidity of the market.

Freitas added that it was too early to say if the STAR market would attract investors in the long run, as it would be dependent on how the early batch of companies performed.

Moving on to other regions such as Japan's Tokyo Stock Exchange, EY expects to see 90-100 IPOs in 2019, equivalent to 2018. However, EY does not expect any mega IPOs and unicorns to hit the market. As a result, small- and mid-sized companies are expected to form the bulk of IPO activity in the second half of 2019.

However, this does not mean that the region will not face headwinds. The geopolitical situation and trade uncertainties should be closely watched.

Two potential high-profile IPO listings such as ESR Cayman, and Anheuser-Busch Inbev were stalled at the final moments in June and July, respectively.

Both companies had chosen to list in Hong Kong, but eventually pulled the plug due to ongoing market conditions. Unrealistic valuations were also a concern.

In Southeast Asia, EY expects the level of IPO market activity to remain quiet in the second half unless geopolitical and trade uncertainties stabilize. EY expects entrepreneurial companies to dominate IPO activity.

In the first half, Southeast Asia saw 48 IPOs that raised $2 billion, up 8% and 55% from a year ago, with industrials dominating the market in terms of the number of deals, followed by real estate, media and entertainment, and consumer staples.

In the first half in Malaysia, the LEAP platform that lists small- and medium-sized companies saw the biggest volume of IPOs at 14 that raised a total of $309 million.

However, Singapore dominated the regional IPO market in the first half in terms of the amount raised at $1.2 billion for eight IPOs. Among the eight, there were two mainboard listings in the Real Estate Investment Trust sector that raised over $1 billion, including Eagle US Hospitality Trust, and ARA US Hospitality Trust.

Thailand's benchmark stock index, and its Market for Alternative Investment saw nine IPOs that raised $265 million. Indonesia accounted for the highest deal number among ASEAN exchanges in the first half, or 35% of regional volume, and 10% by proceeds.

While EY might be forecasting slower-than-expected IPO activity in the second half, companies in Southeast Asia are not shying away completely. In fact, since the start of the second half, Thailand's largest mall operator, Central Group, announced that it is set to list its Central Retail Corp. on the benchmark index.

CRC will combine retail businesses in Thailand, Vietnam and Italy for the purposes of listing. According to Reuters, Central Group will also delist another retail subsidiary, Robinson, as part of the share sale.

Another IPO to watch is the upcoming debut of home improvement retailer AllHome on the Philippines Stock Exchange. AHM is reportedly looking to raise $400 million. The company is also planning to open 19 stores in the second half on top of two stores already opened earlier in the year with another 19 targeted for 2020.

DealStreetAsia is a financial news site based in Singapore focused on corporate investment activity in Southeast Asia and India. Nikkei recently announced the acquisition of a majority stake in the company.

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