While the largest initial public offering (IPO) in the first half of this year was Facebook, the second largest was that of a firm in Malaysia.
Felda Global Ventures, one of the world’s largest palm oil operators, raised $3.1 billion. The palm oil operator’s shares jumped 10 percent on the first day of trading, despite a 36 percent drop in first quarter profits to $70 million, as investors took comfort from the fact that palm oil prices have tripled over the last decade.
However, the subscription raised was modest compared to the $16 billion that the US social networking firm had raised, or the $22 billion that the Agricultural Bank of China raised in July 2010 — the largest IPO in Asia.
Felda’s offer was followed in July by the third-largest IPO of the year, the $2 billion issue by another Malaysian company, IHH Healthcare, in Kuala Lumpur and Singapore.
However, Felda and IHH, Asia’s largest hospital operator, were rare bright spots in a bad year for IPOs across Asia.
Companies have either come at the bottom of their expected ranges or canceled their issues altogether. The malaise is not contained to a single market but has spread across much of the region through the first half of the year.
“The conditions are so poor that the IPO market is rather bad,” says Francis Lun, managing director at Lyncean Holdings, an investment company. “The companies that are listing now are doing so because their earnings will drop sharply next year. Market sentiment is so poor that I don’t think you will see any large international listings any time soon.”
In South Korea in June, refiner Hyundai Oilbank postponed a $2 billion IPO. It was “due to uncertainties over the success of the IPO, as the eurozone crisis is spreading across the world and investor sentiment has turned weaker”, the company said in a statement.
The postponement was the fifth in a few weeks in the region.
A couple of days earlier, the most popular football club in the world turned its back on Asia’s equities markets. Manchester United had first considered a listing in Hong Kong, then settled for a $1 billion issue in Singapore but eventually put those plans on hold due to weak market sentiment. The team’s owners said in June that they would move forward with a listing in the US.
Another sports-related issue, the $3 billion listing of Formula One in Singapore, was also put off indefinitely. India’s Reliance Communications, which has some $7 billion in debt, planned to raise $1 billion by listing its underwater cable unit in Singapore, but said in late July that it would put off the issue.
Ascendas Hospitality Trust planned to issue an IPO in Singapore but had to lower the size of the offering after it was forced to take a South Korean hotel out of its portfolio. The size of the IPO was cut to a very modest $304 million. The company priced the IPO at the bottom of the range.
In 2011, Prada, the Italian fashion house, had managed to raise $2.6 billion in a Hong Kong IPO that was five times oversubscribed. It was a rare happy moment. The same year, luggage maker Samsonite raised $1.25 billion in Hong Kong, the minimum it was seeking. But this year, Graff Diamonds, a London diamond specialist, canceled a Hong Kong IPO due to poor market conditions.
In February, Calgary-based and Hong Kong Stock Exchange-listed Sunshine Oilsands sold more than 60 percent shares in its IPO to cornerstone investors. In July, Chinese clean energy company Huadian Fuxin Energy did the same. In both cases, the cornerstone investors were State-owned enterprises from the Chinese mainland.
IPOs raised 46 percent less money around the world in the second quarter of the year compared to 2011, according to international accounting firm Ernst & Young. Although overall deal value around the world in the first half of the year is higher than in 2011, Asia has not fared well. The US market accounted for 60 percent of total fundraising.
The number of deals and their total value was lower in the first half of this year than in 2011 in Hong Kong, Shanghai and Shenzhen, says Ernst & Young partner Ivan Tong.
“There has been no mega IPO in Hong Kong in six months,” Tong notes.
In China’s A-share market, the funds raised were 58 percent lower compared to last year.
Deal volumes fell everywhere in Asia through the first half of the year, except in Malaysia. Across the region, equity capital market deals dropped more than 30 percent in the first half of the year to $78 billion. IPO volumes were down 62 percent.
The shortage of IPOs in Asia is linked to the poor performance of many of the region’s stock markets.
While Asia is home to some of the best performing economies, even these have been cooling. Economic growth is highly correlated with corporate earnings, explains Rahul Ghosh, head of Asia research at Business Monitor International.
“China’s economic activity has cooled materially, India’s economy remains in the doldrums, and export-oriented economies such as Hong Kong and Taiwan are also feeling the pinch of weaker trade flows. The lack of a V-shaped recovery in China, acute demand weakness in the eurozone, and a stuttering US economy in the second half of 2012, all bode ill for regional growth,” he adds.
The three worst performing stock markets in the world in the first half of the year were Shanghai, Tokyo and Sydney.
The more developed markets in the region such as Hong Kong, Taiwan and Singapore have done worse than their brethren in Southeast Asia. Investors in these markets are counting on weaker earnings, while companies are starting to offer better dividend yields. The one exception could be Vietnam, which may be set for a long bull run.
In the first half of the year, emerging Southeast Asian markets have performed much better. The Philippines, Indonesia and Thailand are near all-time highs. But signs of weakness are already surfacing.
The number of corporate defaults jumped in the first half of the year from zero last year to 2.6 percent. Credit rating agency Moody’s Investors Service now expects a 5 percent default rate for corporates in Asia this year, up from an earlier estimate of 2.3 percent. Two rated-non financial corporates defaulted in the first half of the year; the last such default had been in the third quarter of 2010.
“The region’s estimate mirrors the global trend, for which the (credit transition model) forecasts a rise to 3 percent by end-2012,” notes Moody’s group credit officer, Clara Lau.
The agency expects moderate to high economic strength in Indonesia in the near future which could see growth of 6 percent this year, just slightly lower than in 2011.
The prospects for Malaysia are also good, following years of economic fine-tuning.
Heading into the second half of the year, some expect a turnaround.
Fred Gibson, an economist at Moody’s Analytics, notes that the house expects economies in the region — including China — to have touched bottom and begin rebounding. The big “if” is the crisis in Europe. Barring a “major event” there, the second half of the year could be better.
Gibson believes the fundamentals of regional economies should start to kick in, including growth in China and the resilience of Association of Southeast Asian Nation economies. Cyclical sectors, like tech, should also start to kick in. At the same time, policymakers in Asia have a lot of room to respond to a significant event through interest rates and monetary policy. Moody’s Analytics expects Europe to “muddle through” the ongoing crisis.
But “the view is still weighted on the downside”, adds Gibson.