HK companies look West for IPOs

Has the climate for IPOs in Hong Kong gone cold? Last week China Resources Peoples Telephone became the latest in a string of Chinese companies to have a disappointing stock market debut. The poor uptake of Peoples Telephone’s shares forced global coordinator UBS to buy 8 per cent of the company.

Meanwhile, earlier in March, Semiconductor Manufacturing International Corp (SMIC) and Tom Online fell by 9.01 per cent and 6.67 per cent respectively on their first day of trade.

Against this backdrop it is hardly surprising, therefore, that at the start of the month Solomon Systech (International) priced its IPO towards the low end of the HK$1.6-HK$2.05 (11p-14p) indicated range.

However, Chris Williams, the Hong Kong-based Richards Butler corporate partner who is advising Solomon Systech on its IPO, remains optimistic about the future of the IPO market. “At the moment things are looking good and people are generally very busy,” he insisted.

Meanwhile, Tom Britt, a Hong Kong-based partner of US firm Debevoise & Plimpton, said that although the current IPO frenzy is reminiscent of the late 1990’s dotcom boom, the market conditions will continue to be robust.

“There are lots of folk out here who can remember
very well that the market conditions in early 2000 deteriorated very rapidly, so everyone’s being very cautious,” noted Britt.

He added: “The companies accessing capital markets today are real and profitable, but companies issuing during the dotcom boom weren’t. That proved to be very short-lived.”

Indeed, local observers argue that some of the big IPOs, including the whopping $5bn-$10bn (£2.7bn-5.39bn) listing of China Construction Bank, the first state-owned Chinese bank to seek a listing overseas, have yet to take place. As first reported in The Lawyer in February, Herbert Smith and Skadden Arps Slate Meagher & Flom won the mandate to advise the bank on Hong Kong and US law respectively (16 February).

Several Chinese companies, including SMIC and Tom Online, also tried to access the US capital markets by doing dual listings in Hong Kong and on Nasdaq.
But Herbert Smith corporate finance partner Jim Wickenden predicted that, in the future, fewer Chinese companies would raise capital through Nasdaq and would instead undertake Rule 144A offerings. This is due to a number of factors, including the stricter disclosure requirements introduced through Sarbanes- Oxley. Additionally, since the commission charged by investment banks for full US listings has eroded, bankers are less likely to recommend them to their clients.

Another major factor that may deter Chinese companies from listing in the US is the increased trend towards class actions. For example, the souring sentiment towards Hong Kong IPOs was compounded by a class action brought in the
US against China Life Insurance, which completed a $3.5bn (£1.89bn) dual listing in Hong Kong and New York last December. The suit alleges that China Life and certain of its directors violated federal securities laws by failing to disclose financial irregularities relating to its state-owned parent company, which artificially inflated the insurance giant’s share price.
The trend towards 144A offerings is likely to affect the US firms adversely, which to date have done very well out of the booming IPO market. “I think whenever there’s a full listing in the US, issuers are keen to have a US firm involved. But virtually all the lawyers in City firms have the skill set to advise on 144A offerings,” said Wickenden.

Despite SMIC’s, Tom Online’s and Peoples Teleph-one’s lacklustre stock market debuts, there are still plenty of Chinese companies wanting to raise funds on equity markets. So it seems likely that the IPO boom will continue well into 2004, giving law firms and investment banks plenty of work to feast on.

Chinese companies’ major IPOs 2004
Issuer Adviser(s) to issuer Adviser(s) to underwriter
China Construction Bank Herbert Smith
Skadden Arps Slate Meagher & Flom
To be appointed  
China Green (Holdings) Alvin Liu and Partners Lovells
China Resources Peoples Telephone Slaughter and May Simmons & Simmons
Davis Polk & Wardwell
Ping An Insurance Linklaters Sullivan & Cromwell
Semiconductor Manufacturing International Corp Slaughter and May
Shearman & Sterling
Freshfields Bruckhaus Deringer
Skadden Arps Slate Meagher & Flom
Solomon Systech Richards Butler Linklaters
Tom Online Freshfields Bruckhaus Deringer
Sullivan & Cromwell
Milbank Tweed
Hadley & McCoy
Source: The Lawyer