New Issues Setting Records in Hong Kong
A flood of new stock issues is hitting the Hong Kong market at a time when analysts fear that uncertainty over relations with China and the United States may dampen prices.
Listed companies have already raised a record amount of capital this year. Covered warrant issues, in which owners of a stock sell investors a long-term option to buy at a fixed price, have also taken a lot of money from the market.
Unresolved differences between China and Hong Kong over the financing of the new Hong Kong airport as well as uncertainty over the U.S. presidential election are keeping a lid on the market, participants said. Also, a 37%-plus rise in the Hang Seng index since Jan. 1 suggests to some that the market is due for consolidation, if not decline.
But the allure of equity financing is potent. Six companies are in the process of raising a total of $185 million. This is on top of the $970 million that new listings have already raised this year.
“We forecast an outflow of $500 million to $775 million this year,” said Danny Truell, head of research at S. G. Warburg--meaning that investors will pay out more than they receive. Companies give funds back to investors through dividends, but investors give the market funds through new issues, rights issues, private placements and warrant conversions.
Hong Kong-listed companies paid $5.27 billion in dividends last year, up 25.4% from 1990, according to S. G. Warburg. The figures bear out the slowing inflow of funds to the market. Investors got back a net $482 million last year, down from $1.46 billion in 1990.
So far this year it hasn’t hurt the market, analysts said. “A lot of money has been flowing in from the United States this year,” Truell said. But the rising number of issues could hurt the market, he said.
The biggest of the current round of new listings is China Overseas Land & Investment Ltd., a construction company owned by China State Engineering Corp. The company is selling 820 million shares for $0.133 each, a total of $109.3 million. But market participants like the issue.
“The issue is quite oversubscribed,” said Peter Fu, a broker at Peregrine Brokerage. An issue is oversubscribed when investors offer to buy more shares than the company is selling. “Interest in China-related issues is still very good,” Fu said. “It won’t hurt the market.” Peregrine Capital Ltd. is underwriting the issue.
Some analysts think that the new issues will help breathe life into the market. “I think the market needs some new energy,” said Stuart Gregory, an institutional salesman at Morgan Grenfell Asia, which is also underwriting one of the new issues. “There’s plenty of cash around, but the airport talks are keeping people sidelined.”
Investors awaiting the outcome of last week’s talks on the new Hong Kong airport between British and Chinese negotiators were disappointed when the talks ended without apparent progress, analysts said. Negotiators failed to set a date for the next round of talks. Local media suggested that any resolution would have to wait until October, when the new governor of Hong Kong, Chris Patten, gives his policy address.
China is holding up the project because of concerns about the financing, and investors are hesitant to bid up share prices with that uncertainty hanging over the market, analysts said. Analysts don’t expect prices to recover recent losses until the two sides reach agreement.
“Share prices will remain volatile until some agreement is reached on the airport issue,” Paul Parsons, fund manager at Invesco MIM in Hong Kong, said last week. The same thing happened last summer when the airport negotiations were going on, Parsons said. The Hang Seng index has fallen from a peak of 6,200 three weeks ago to 5,900 now.
Uncertainty regarding the U.S presidential election is also putting a damper on the market, said Angus Baxter, a director at Smith New Court. Investors fear that if Democratic candidate Bill Clinton wins the election, China will lose its most favored nation (MFN) trade status.
The United States gives its MFN trading partners preferential treatment. The loss of MFN status for China would hurt Hong Kong companies that manufacture goods in China, then export them to the United States.
Hong Kong’s Strong Market
Several new issues are hitting the Hong Kong’s Hang Seng stock exchange index, which has risen more than 37% since the end of last year. But some analysts fear the rising number of issues could hurt the market. Friday’s close: 5,850.93 (Source: Dow Jones).
