Big banks shift focus to smaller companies
(FT.com)Updated: 2007-05-18 11:16
According to its website, Bosideng, China's largest producer of branded
winter jackets, began in 1976 "with an 11-peasant team only equipped with eight
family sewing machines".
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Bosideng's story highlights the expansion of private companies in China, a trend that is forcing global investment banks to adapt their business models.
In recent years the vast majority of listings, usually overseas, were triggered by the privatisations of state-owned assets in sectors such as telecoms, energy and banking.
That flow peaked last year with the listing of Industrial and Commercial Bank of China, the mainland's largest lender, which raised $21.9bn in a simultaneous listing in Hong Kong and Shanghai.
Bankers are now focused on listing hundreds of smaller companies that are, like Bosideng, privately owned and often based in regions far removed from cities such as Beijing and Shanghai.
While China's authorities are pushing increasing numbers of mainland companies to list on the domestic exchanges, there continues to be a steady pipeline of overseas listings - and not simply focused on the consumer and retail sector.
For instance, Morgan Stanley tops the league table for listings of mainland companies in Hong Kong, with five to date this year.
These include three $1bn-plus offerings in the form of Country Gardens, a real estate developer; Belle Holdings, a women's shoe company; and China Molybdenum, a chemicals supplier. The others include a department store and a textiles maker.
Gokul Laroia, Morgan Stanley's head of global capital markets for Asia, says that five years ago there was a strong investor focus on mainland technology companies. However, he says, investors were now keen to supply capital to a range of companies exposed to China's soaring economic growth.
As well as plays on domestic consumption, Mr Laroia said that there was strong investor interest in the energy and commodity sector, which is supplying the raw materials to fuel economic growth.
He also believes that overseas investors are keen on offerings from infrastructure companies, such as ports operators, and real estate developers, which are thriving on the back of rapid urbanisation.
"Investor sector interest is broadly based unlike the focus on technology companies that we saw five years ago," he says. "We believe there will be a robust market in China IPOs for the forseeable future."
The mainland is forecast to account for about 65 per cent of new issuance in Asia-Pacific, including Japan, this year.
Like other banks, Morgan Stanley has increased headcount - by 30 per cent - this year to take advantage of the opportunities.
The bullishness of investment bankers contrasts with the mood of some analysts, who believe that the ever-rising valuations for Chinese companies are unsustainable.
However, bankers believe that Chinese IPO issuance will continue to be robust because the majority of companies are delivering on earnings expectations, with many growing at a rate of 30 per cent a year or more.
Matthew Koder, UBS' joint global head of equity capital markets, says: "Valuations of Chinese companies are rising, but they remain attractive to investors on a relative basis given the growth expectations."
"The quality of management has increased substantially, and investors are looking for those companies who have the right strategy," he adds.
(For more biz stories, please visit Industry Updates)