The launch of a ten-figure stock market issue is evidence that the equity markets in Asia are functioning. It’s not a sign that they are fully repaired. Zhongwang, the Chinese aluminium group, is looking to tap new investors for some $1.6bn, but its confidence says little about the market's mettle.
Equity raisings have flickered into life recently, but only because the issuers were small or familiar. HSBC, the Anglo-Asian lender and a household name, raised $19bn in a rights issue with relative ease. A couple of tiny initial public offerings also squeaked through, notably Chinese alcohol distributor Silver Base and miner Real Gold – although both now languish beneath their offer prices. Overall, issues in 2009 are still down 95% on last year, according to Dealogic.
Zhongwang is a different sort of test: it's big and unknown. Fortunately for the company, it has some good headlines for the marketing brochure. First, it’s from China, one of the world’s only growing economies. Second, it produces aluminium components for the railway and industrial sectors – both of which stand to benefit big-time from China’s $585bn fiscal stimulus. And third, it’s not a straight commodity play. As an extruder of aluminium, Zhongwang turns rocks into rails, and so is higher up the value chain.
None of these things guarantee success. Zhongwang has been waiting in the wings since last year. The underwriters’ decision to push the button on an initial public offering now, just as China’s economy is turning a corner, smacks of opportunism. Moreover, it hasn’t formally signed up any “cornerstone” investors, say people familiar with the situation. These loyal investors pledge to stick around after the float, reducing the amount of stock flipped back onto the market after the first day’s pop.
Smaller deals of the kind done so far this year – even bad ones – have seemed easier to get away, maybe because of their scarcity value. Straight share placings, meanwhile, can be done and dusted in a few hours. But a billion-dollar IPO leaves backers exposed to the market’s gyrations for weeks. Even if Citic, JPMorgan and UBS decide to take the risk for this zeitgeisty Chinese issue, don’t expect others to share their bravado.