Published July 27, 2009

SGX struggles to stoke the fire of 'dragon chips'

China listings dry up in the face of competition from Korea, M'sia

By LYNETTE KHOO

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(SINGAPORE) New mandates for Chinese listings will be harder to come by for Singapore's stock exchange as the fight for the 'dragon chips' gets more intense among regional bourses. Issue managers here are receiving fewer inquiries from Chinese companies.

But Chinese companies are still actively seeking equity funding, going by the flood of new initial public offers on the Shanghai and Shenzhen bourses after China lifted its nine-month moratorium on IPOs last month.

Singapore Exchange (SGX) has declined comment while issue managers note that the pipeline of Chinese IPOs has cooled. There is concern that the new Chinese issuers will get snapped up by regional peers.

Brendan Goh, head of corporate finance at DMG & Partners Securities, told BT that he is not seeing new inquiries from Chinese companies seeking a listing on SGX. Most of the IPO mandates at hand are deals sewn up months back.

So far this year, there there have been no Chinese IPOs on SGX yet. Two Chinese companies - Great Group Holdings Ltd and China Gaoxian Fibre Fabric Holdings Ltd - lodged their IPO prospectus here last month. China Dongyuan Environment, a waste gas treatment provider, is on track to a backdoor listing on SGX via a reverse takeover by Gates Electronics.

'We understand that more Chinese companies are now seeking IPOs on Bursa Malaysia and Korea Stock Exchange,' Mr Goh said.

David Hoon, co-head of investment banking at CIMB Bank, noted that while there are still inquiries on the Singapore market, Chinese issuers are keeping their options open.

'We are facing a lot of competition from other markets like Bursa Malaysia and Korea Stock Exchange,' he confirmed. Chinese IPO candidates now have more options than in the past.

Bursa Malaysia recently welcomed its first foreign listing this month - Xingquan International Sports Holdings - handled by CIMB. The Chinese shoemaker had aborted a Singapore IPO at the halfway stage and chose to list on the Malaysian bourse instead, in a deal worth about RM200 million (S$82.4 million).

Some say that Malaysia's move to scrap a rule that requires listed companies to set aside 30 per cent equity for bumiputras will make Bursa Malaysia more attractive and a stronger contender for Chinese listings.

'We hear of companies going to Malaysia, and Australia as well, especially for smaller listings,' said Allen Cheong, head of equity capital markets at Daiwa Securities SMBC Singapore.

Potential S-chip candidates may be apprehensive of the negative publicity caused by the few troubled S-chips here, he noted. 'It is not surprising that they would explore alternative listing venues, which are welcoming them with open arms,' he said.

Will the local bourse be left high and dry, while the IPO wave passes it by? BT understands that some market players have voiced such concerns to SGX.

The recent appointment of Nasdaq OMX president Magnus Bocker as CEO of SGX has also stoked debate on whether the Exchange will change tack on its China strategy. Some market watchers do not foresee a change in this aspect.

'I don't think our policy to attract PRC issuers will change because it remains our forte,' said Robson Lee, a partner at Shooklin & Bok.

China remains an attractive pool to fish for companies that could come to Singapore, added Ng Joo Khin, director at Stamford Law. 'It is a question of how to attract strong companies to come.'

But IPO players noted that poor perception and pricing of S-chips may give Chinese companies second thoughts about heading straight to the Singapore market.

Two Fujian-based sports-shoe makers - Suoli China Group and Sports Asia Ltd - withdrew their IPO prospectus last month. According to a source close to the matter, the withdrawal by Sports Asia was due to poor pricing and insufficient placements during book-building.

Daiwa's Mr Cheong notes that it is difficult to push out an IPO in sectors that are pricing in starkly low price-to-earnings ratios (PEs).

SGX-listed China Eratat and China Sports are trading at 1-3 times PE while China Hongxing is trading at about 5.9 times historical PE. Xingquan was trading above 5 times PE on Bursa Malaysia before losing steam to about 4.94 times PE.

Governance issues in some S-chips and reduced liquidity in the retail space have also deterred fund managers from bidding up these counters, some IPO managers believe. Most qualified domestic institutional investors (QDII) funds are focusing on the Hong Kong market, which is commanding higher valuations and liquidity.

'Institutional investors are still cautious because not all S-chips are out of the woods,' DMG's Mr Goh said. But interest has improved from the first-quarter low when cashflow woes and other accounting issues cropped up at some S-chips.

Some market players believe that the tepid pace of Chinese listings here may be just a blip.

'I would like to think that this is a short-term problem,' added CIMB's Mr Hoon. 'Over time, with the advantages that Singapore has over other markets, we should still see a certain flow of listings from China.' He is currently working on some prospective Chinese listings, but declined to indicate a timeline.

For now, Bursa Malaysia and Korea Stock Exchange may offer better pricing for Chinese listings, given the lack of Chinese listings and pent-up demand, said Chia Kim Huat, partner at Rajah & Tann.

'But the overall market landscape here is much deeper and more established than that of its regional peers,' he added. It would probably take some time before other regional markets build up a critical mass of Chinese listings.