Initial public skepticism

The market for Chinese companies listing abroad ground to a near standstill last year as the economy slowed. In Hong Kong, new offerings dwindled going into the summer as the value of initial public offerings (IPOs) fell to levels not seen since the financial crisis. The market completely dried up by fall, with no new companies joining the bourse in September.

In late November, however, the first green shoots sprouted from what appeared to be dead ground as Cantonese diner chain Tsui Wah conducted a resoundingly successful IPO in Hong Kong. Its shares jumped 13% on November 26, its first day of trading, and its stock has continued to trade at a premium to its listing price.

Tsui Wahs solid performance is one of a few signs that investor sentiment toward China-related IPOs is reversing. On November 21, shares of YY surged as the mainland social media network went public in New York. The companys stock had climbed 39.6% from its offering price to close at US$14.66 as of December 18.

No doubt, the success of both these issues relied on the string of positive economic data coming out of China. October brought a raft of positive indicators, from retail sales to industrial production, and manufacturing surveys show activity accelerated for a second month in November. With the Chinese economy looking increasingly attractive compared to the US and Europe, foreign investors appear to be warming to China-related IPOs.(This contrasts with investors in mainland exchanges, who remain overwhelmingly negative; the Shanghai Composite index sank to a roughly four-year low in late November.)

A toe in the water

This reversal in sentiment faced its first major test on December 7. Shares in the Peoples Insurance Company (Group) of China(PICC) began trading in Hong Kong after the company raised US$3.1 billion the week before through subscriptions. The countrys second largest insurer can now claim the title of biggest IPO in Hong Kong since the Agricultural Bank of China raised US$22.5 billion in 2010.

The media read a lot into the PICC issuance. Headlines in advance of the float alternately claimed that the companys preparations portended an imminent resurgence of IPOs or continued weak investor sentiment. Bullish observers focused on the strong subscriptions for the PICC issuance: The 17 cornerstone investors provided a strong base by buying more than half of the shares, while the retail segment oversubscribed by 15 times.

But bears were quick to point out that PICC priced the offering at the low end of the previously announced range. This fact deserves closer examination. YY too priced its offering at the low end of its indicated range. This ultimately proved good for investors, as it left more room for YYs share price to climb once it was open to public investment. PICC appeared to be similarly position. At the least, pricing alone was no clear indicator of what happened when shares hit the open market.

In this tough investment climate, only the strongest companies can carry out an IPO. Stricter regulations on IPOs in Hong Kong released late last year and pending final government approval should further ensure that only the strong will list. A strong company like PICC or Tsui Wah that is dragged down by weak overall sentiment should be an easy sell to investors looking to beat the market.

The trouble with momentum

The performance of IPOs hinges on investor sentiment even more than most other investment classes. IPO subscribers who are not bound by lock-in agreements to hold their stock look for the price to jump as soon as the shares hit the market, so they can unload their investment for a quick profit. These investors care as much about how others will react to the issuance as about company fundamentals.

This type of investor sentiment feeds off itself. If PICCs issuance failed to post gains, any newfound confidence in the IPO market would likely have been lost. But if PICC delivered high gains out of the gate, it would add to the momentum of Tsui Wah and YY, and investors would look more favorably on the issuances that followed.

In many ways, December 7, PICCs first trading day, resembled Groundhog Day, the loveable but ridiculous American holiday in which a groundhog is charged with determining how long winter will last. PICC emerged confidently from the cold ground on that Friday, surging 6.9% on its debut, an indicator that the market will likely see an earlier thaw to the IPO deep freeze.

Hong Kong could now be positioned as the go-to market for Chinese IPOs. Regulators have halted IPO approvals on the mainland, as a rash of new listings deflates valuations; as of early September, more than 800 companies were in the pipeline to list on mainland exchanges. Chinese companies are also unlikely to float shares in the US as they wait to see the outcome of a Securities and Exchange Commission investigation into Chinese firms listed there.

If China continues to release data indicating the economy is picking up, demand for Chinese company IPOs could continue to grow. The most likely place for such a thaw to begin is Hong Kongs reinvigorated market.