Last month's Hui Xian Real Estate Investment Trust IPO has so far failed to provide Hong Kong Exchanges and Clearing (HKEx) with the hoped-for benchmark deal with which to launch its offshore renminbi-denominated (CNH) equity market, as market participants blamed weakening retail sentiment and institutional concerns over deal pricing and settlement processes.
Shares in the REIT tumbled almost 10% on its secondary market debut on 29 April, closing at CNH 4.75, and, despite rallying on the following trading day, 3 May, fell further on Wednesday.
Spun out of Cheung Kong Holdings, owned by Hong Kong business tycoon Li Ka-shing, the Hui Xian REIT raised CNH 10.5 billion (US$1.6 billion) at CNH 5.24, the lower end of its pricing range, on 20 April. With renminbi deposits in Hong Kong reaching CNH 408 billion earlier this year, many anticipated that the retail market in particular would lap up the deal enthusiastically, the more so given its association with one of Hong Kong's wealthiest and highest profile businessmen.
However, the size, currency, yield and underlying assets of the deal, as well as recently reduced demand in Hong Kong's HK$-denominated IPO market, have all been cited as reasons for the REIT's lacklustre performance to date.
“This year, several deals have underperformed in the after-market despite in some cases being postponed and repriced or priced at the lower end of the range. In addition, only a few REITs have ever listed and performed well in Hong Kong, in contrast to Singapore,” said John D’Abo, managing director, head of equity syndicate, Asia, RBS.
Earlier this year, two Chinese firms, China NT Pharma Group and Hilong Holdings, an oil and gas company, postponed their Hong Kong IPOs, while Hongqiao Group, a Chinese aluminium producer, scaled back its HK$2.2 billion IPO to just HK$800 million. “Against that backdrop, you can see that retail appetite is not particularly strong at the moment,” a broker observed.
Compared to successful Hong Kong IPOs of the past that have been covered up to 100 times, the Hui Xian REIT's retail coverage of 2.5 times represents “something of a failure”, according to some sources. Retail demand had been courted via 100,000 prospectuses distributed around Hong Kong and an exceptional nine-day offering period. The yield on the REIT, 4.25% at its IPO price, is significantly higher than the rate being paid in Hong Kong CNH bank accounts (around 0.5%), but below that available on HK$-denominated REITs (around 5.5%). Research from Standard Chartered Bank predicts that the People's Bank of China will allow the official onshore renminbi (CNY) to appreciate by at least 5% against the US$ over the course of 2011, in part driven by rate hikes imposed to drive down inflation.
Despite the vast quantity of CNH deposits available in Hong Kong, at CNH 10.5 billion, the Hui Xian REIT is significantly bigger than any of the CNH-denominated debt issues – known as dim sum bonds – launched in Hong Kong over the past two years. Total CNH-denominated debt issuance in Hong Kong stood at CNH 36 billion in 2010, with Bank of China's CNH 2.8 billion three-year bond, launched in September, the largest corporate deal of the year.
Although some observers felt that a REIT was a suitable first vehicle for offshore renminbi equity issuance, as it provides predictable cash flows and is thus likely to be relatively stable, others have pointed out that REITs rarely rally from their IPO price and therefore do not offer appealing short-term gains. Others sources suggested that historic investor returns from other listed firms within Li-Kashing's empire had been unspectacular.
Liquidity was a major concern ahead of the deal, particularly for institutional investors that do not necessarily have a natural supply of CNH. Well in advance of the deal, HKEx consulted closely with brokers to ensure investors had sufficient access to CNH to support their interest. It has also outline plans for a trade support facility (TSF), which conducts the necessary FX conversions to settle CNH-denominated trades by local brokers that wish to invest on behalf of clients but don't have multicurrency capabilities. The TSF was not in place for the Hui Xian's REIT, but is expected to be available at the end of Q2 / beginning of Q3 to support secondary trading in the REIT and any subsequent CNH IPOs.
“HKEx was very keen to ensure that sufficient CNH would be available to support this deal because it needs to be successful to pave the way for future issuance. They didn't want the lack of CNH in the system to be the reason for people not participating in the deal,” said Hani Shalabi, head of Advanced Execution Services, Asia Pacific, Credit Suisse.
Nevertheless, expectations of muted institutional interest were confirmed by sources. “Institutional demand does not appear to have been especially strong for this deal, because this investor class is not sitting on surplus CNH,” said one broker,
Sources at some international investment institutions acknowledged that implementing new settlement procedures, i.e. opening a CNH account with a custodian, played a role in the low level of appetite for the REIT.
“It's a simple process, but there is paperwork involved for you, the custodian and the local agent,” said one source. “You would go through those extra steps in advance if there was a pipeline of IPOs but it's not necessarily worth it for just this one deal.”
Another asset manager said the REIT was not sufficiently “attractively priced to make up for the hassle”. Other investors suggested that the new processes would not have been an issue for the right deal. “The asset was not diversified and it was not at an attractive valuation,” a buy-side source commented.
The development of CNH-denominated instruments in Hong Kong is seen as significant to the city's long-term future as China's leading international financial centre. Although there is no official timetable for phasing out either the HK$ or the quota system that allows international investment in A-shares listed in Shanghai and Shenzhen, HKEx is regarded as keen to establish a track record in CNH equity issuance well in advance of the onset of competition with mainland Chinese exchanges. Generating renminbi issuance capabilities is a key plank of HKEx's current three-year plan, implemented by CEO Charles Li, who recently suggested to the Wall Street Journal that Hui Xian REIT was part of “seismic change that is taking place in our market over time”. The importance of the deal was reiterated at a ceremony held before its first trading session. “This strengthens Hong Kong's position as an offshore trading renminbi hub,” said Eddy Fong, chairman of the Securities and Futures Commission, Hong Kong's financial regulator.
Earlier this year, HKEx's Li predicted only one or two CNH IPO's this year, but the Hui Xian REIT's performance to date is unlikely to stimulate supply of CNH-denominated stocks listed in Hong Kong.
“HKEx will do all it can to line up other CNH-denominated IPOs but ultimately the market will decide future issuance. They can bring the horse to water but they can’t make it drink,” said one source.
China's currency is referred to both as the yuan and the renminbi (which translates as ”the people's currency'). Its official abbreviation is RMB, but is also commonly abbreviated to CNY, while CNH is often used to refer to the offshore deliverable market in Hong Kong.