China’s ever-growing international presence is evident in more ways than one, but its integration with and presence in developed capital markets around the globe is undoubtedly a dramatic example. In 2009, 183 Chinese companies raised US$50.4 billion in public equity markets, representing 45% of worldwide Initial Public Offering (IPO) volume, indicating that where Chinese companies choose to list is having an increasing impact on foreign exchange IPO activity.
The statistics behind the country’s momentous capital market growth foretell a promising future for Chinese IPOs. Listing on a developed foreign country’s exchange has long been an aspiration of Chinese companies; 38% of all Chinese companies listed in the past five years have done so overseas. The prestige and publicity seemingly outweigh the costs and accounting complexity associated with foreign public offerings.
But as China’s capital market continues to mature, exemplified through the launch of the Growth Enterprise Market in late 2009 and the State Council’s pledge to transform Shanghai into the world’s financial center by 2020, the allure of listing in international markets is beginning to taper off.
This proposition prompted Evalueserve, a global research and analytics firm, to conduct a survey with 150 Chinese companies to gain insights on their IPO preferences and reasons behind their decisions. The survey targeted private Chinese companies that have the intention of raising capital in public markets over the next few years and Chinese publicly-listed companies that have raised capital via an IPO in mainland China or overseas. Respondents varied widely in terms of size and industry. The findings revealed:
A higher proportion of domestic listings can be expected. Over the past five years, 62% of Chinese IPOs listed on a domestic exchange, but 76% of private companies surveyed indicated an interest in a domestic listing versus an overseas listing.
Local listings are likely to transfer from the Shenzhen Exchange to the Shanghai Stock Exchange. In the past five years, 92% of all domestic IPOs were listed on the Shenzhen Exchange. Evalueserve’s survey indicates that over 62% of private companies will lean towards listing on the Shanghai Stock Exchange within the next five years.
Chinese companies may prefer domestic exchanges even over the neighboring Hong Kong exchange. Throughout the past five years, 18% of Chinese IPOs were listed in Hong Kong. Around 9% of surveyed respondents expressed interest in a Hong Kong IPO.
In addition to Hong Kong, U.S. and Singapore exchanges will continue to be the main contenders for overseas listings. Survey respondents indicated little or no interest in other areas of the world, in line with past trends. Over the past five years, less than 4% of Chinese IPOs were listed outside mainland China, Hong Kong, Singapore and the U.S.
Contrast to recent history, investor capital in the west has been limited during the past two years and IPO valuations in general have been low. Not surprisingly, over half (54%) of the respondents in Evalueserve’s survey revealed that prolonged market weakness is a deterrent to listing overseas, as IPO price-to-earnings multiples are far less attractive.
But beyond temporary valuation weakness, a more powerful and sustainable motive is at the forefront of this transition. While prestige remains an enticing feature for companies to list overseas – 46.8% of private companies surveyed indicated it would be a driving factor for leaning towards an overseas IPO – the sense of prestige and global recognition that was once sought after in overseas markets is becoming more attainable through domestic listings as the world spotlight is shining brightly on China.
The government’s effort to reform the country’s markets in line with globally developed economies may be a slow and steady process, but it’s rapidly encouraging Chinese companies to tap their own markets for capital rather than to look overseas. Evalueserve’s survey revealed that nearly three-quarters of Chinese businesses cite increased financial reforms as a reason for preferring a domestic IPO, despite a longer wait period due to regulations set by the China Securities Regulatory Commission. Even companies with mainly international customers stated they are leaning towards a domestic IPO. Over 65% of respondents with a global customer base suggested they were interested in a domestic IPO.
Exemplified by the recent listing of the world’s second-largest IPO, Agricultural Bank of China, on the Shanghai and Hong Kong stock exchanges, Chinese companies are increasingly preferring to raise capital close to home. For the first half of 2010, the Shenzhen and Shanghai exchanges were the first and fourth busiest in the world, raising US$22.6 billion and US$8.2 billion respectively.
A major reason Evalueserve’s survey respondents applied for an overseas listing was prestige and global brand expansion, but that notion is losing ground. Of the companies surveyed with overseas listings, 38% said they would turn to domestic markets if additional capital was necessary. Over 80% of companies already listed in China stated they would consider tapping the domestic market again for additional capital.
Like the overall economy, underlying factors necessary to maintain China’s IPO trends are heavily reliant on the government’s commitment to reforms. Persistent sophistication of the domestic financial market is essential as Chinese capital markets are still in an infancy stage. However, a conclusion can be drawn from Evalueserve’s survey that Chinese companies believe the country’s capital market development is on the right path.
Author : Frank Yazdi, Head of Investment Research for Evalueserve China
