(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)
By Wei Gu
HONG KONG, Sept 2 (Reuters Breakingviews) - Small is beautiful for Chinese initial public offerings –- which leaves big bank underwriters like China International Capital Corp and Goldman Sachs (GS.N) with slim pickings. So far in 2011 action has shifted to China’s second-tier stock markets, which favour nimbler small underwriters. The southern city of Shenzhen has raised twice as much equity capital as Shanghai this year. Big guys need to adjust.
Other than UBS UBSN.VX and Deutsche Bank (DBKGn.DE), foreign branded securities joint ventures have appeared on not a single IPO this year. Nor has domestic giant CICC, which this time last year was the top underwriter with 11 deals. Two Shenzhen-based small firms, Ping An Securities and Guosen Securities, surged to the top. Together with 48 deals, they account for 22 percent of the $30 billion IPO proceeds this year.
That reflects a shift in the IPO market. Large privatisations like the $10 billion listing of Agricultural Bank of China (601288.SS) in 2010 are scarce, since most of China’s state-owned enterprises are now listed. This year’s biggest IPO, of Sinovel Wind (601558.SS), was just $1.4 billion. Demand is geared to small private companies, who had been made to wait in line by regulators, but who are popular with China’s big retail investor base.
The economics of smaller deals are getting more attractive too. The average IPO in Shanghai is 3.5 times the size of those on growth-company market ChiNext, in Shenzhen, but the fees aren’t proportional. Smaller IPOs offer 4-5 percent, compared with roughly 2 percent for the biggest. In money terms, a big board IPO offers on average 40 percent more fee than a second-tier IPO, but with a lot more balance-sheet risk.
Big firms may thus need to think small. That might mean top China bankers head to the provinces more often to win over smaller clients. Global banks could also be more generous about sharing their global connections with local joint-venture partners, which the foreign partners often try to avoid since they only own minority stakes. Of course, the global banks could always sit on their hands, and wait for big deals to come back into fashion. By that time, their smaller rivals may not be so small any more.
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-- China’s stock markets saw $30 billion of initial public offering proceeds in the year to Aug. 30, a 40 percent decline on the same period in 2010, according to Thomson Reuters.
-- IPO proceeds from the main board, the Shanghai stock exchange, dropped by 60 percent to $9.2 billion. The value of IPOs on Shenzhen’s small and medium enterprises market fell 44 percent to $11 billion, while that of Shenzhen’s growth company market ChiNext rose 4 percent to $9.2 billion.
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