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| Cover Story: Bursa’s tightrope act with foreign IPOs |
| Written by Kathy Fong | |||
| Monday, 01 June 2009 00:00 | |||
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Tapping the equity market is an obvious channel to raise funds, but the queue for an initial public offering (IPO) in China’s two exchanges is endless. Companies need to wait for two years to obtain approval for a listing exercise. The smaller ones may not even be granted the green light. Hence, an overseas listing offers a better chance for these companies. Hong Kong is the foreign market closest to home and investors there, be they foreign or local, are no stranger to China-based companies. However, the Hong Kong Stock Exchange seems to be a platform mainly for state-owned enterprises, such as banks, resource-based companies like PetroChina, or big private companies that have revenue in the billions of yuan. Small and medium-sized entreprises find it difficult to compete with the giants for capital there. Looking further afield, Singapore is the next alternative. Its exchange already has about 170 China-based companies, commonly known as S-chips, listed on the Singapore Stock Exchange (SGX). Unfortunately, sentiment on the S-chips in the republic has been dented badly by the increasing number of corporate scandals since the onset of the global financial crisis. China-based companies are generally perceived by many as lower grade companies that are more likely to fail or that have accounting irregularities. Needless to say, it will be an uphill task to seek equity funding in Singapore, at least for now. As for the West, the glory of floating shares in the US and Europe has faded after the severe credit crunch that has hit their economies. Investors’ confidence in London’s Alternative Investment Market (AIM) has collapsed. The US Nasdaq board isn’t doing any better. Where else could Xingquan raise its much-needed funds? Investment bankers in Malaysia are happy to suggest Bursa Malaysia. Bursa Malaysia a new listing destination Indeed, more foreign companies like Xingquan have started to consider Bursa as their IPO destination. It is learnt that a number of China-based firms are in various stages of preparation for a listing exercise in Malaysia. The Securities Commission (SC) is said to have already granted approval for one Chinese company, which is likely to be Xingquan. Three more such applications are expected soon, if they have not already been submitted last week. Officials from the SC and Bursa have even travelled to China for site visits as part of the due diligence process. Institutional investment funds, including government-linked funds such as Tabung Haji, are also invited for such visits as these companies are looking for cornerstone investors to take up their offers, The Edge has learnt. Apparently, other foreign firms are showing interest in the Malaysian bourse too. Besides China-based companies, Vietnamese firms are exploring opportunities for IPOs on Bursa following the meltdown of the Ho Chi Minh Stock Exchange. Meanwhile, Doha-based Ezdan Real Estate Co is believed to have picked Malaysia to list its real estate investment trust (REIT). Investment bankers have widened their scope to look abroad, particularly in the emerging economies, for suitable candidates for IPO exercises. CIMB executive director Datuk Charon Wardini Mokhzani tells The Edge that the banking group, which has experience with such listing exercises on the SGX, is now advising foreign firms, including China-based companies, seeking a listing on Bursa. Charon believes there is a window of opportunity for Bursa to attract quality foreign companies to list here. “To their credit, the regulators, namely the SC and Bursa, have been proactive in facilitating the development of this market and are providing a rigorous framework for foreign listings,” he says. Kenanga Investment Bank Bhd’s acting CEO Lee Kok Khee says the investment bank, too, is in the process of getting foreign firms to list on Bursa. He notes that in the past, other exchanges in the region were preferred due to their “perceived superior liquidity”. “However, the recent washdown in other markets and the fact that Bursa had outperformed the others in the last two quarters in 2008 has sort of improved the visibility of the local exchange,” he adds. Shareholding waiver attracts foreign IPOs The sudden rise of foreign interest in listing shares on Bursa is mainly because of the waiver of the 30% requirement for bumiputera shareholding. Late last year, the Ministry of Finance announced that foreign companies that are listed on the local stock exchange would no longer be required to have 30% bumiputera shareholding. Investment bankers and corporate advisers agree that the waiver of the bumiputera shareholding requirement is a big pull factor. “The waiver has put Bursa on par with other regional bourses as far as IPO exercises are concerned. There will be zero regulatory impairment,” says a corporate adviser. On top of that, the local authorities have cut red tape to ensure speedier approvals. In addition, the lower listing fees due to favourable exchange rates have made Bursa more appealing to foreign entrepreneurs who are seeking fresh capital. “Our regulators have facilitated a significant improvement in time-to-market, without compromising on their rigorous review standards. These efforts seem to be bearing fruit,” says Charon. According to corporate consultants who are advising foreign IPOs, another selling point is that the local stock exchange isn’t crowded with foreign companies now, unlike Hong Kong and Singapore. Currently, there is only one China-based company — Sino Hua-An International Bhd — listed on Bursa through a reverse takeover exercise. “The foreign companies listed here will be like a big fish in a small pond. They will get noticed and it is easier to draw investors’ interest,” says a corporate adviser. Besides, CIMB’s Charon points out that the significant pool of domestic liquidity due to the country’s high savings rate will lend stability to the market and help cushion against excessive volatility. “Given these factors in our favour, we are optimistic there will be more foreign listings on Bursa in future,” he adds. For investors, foreign IPOs will allow them to get some overseas exposure, creating one form of portfolio diversification. Institutional fund managers who don’t have the mandate to invest abroad will be able to do so by putting money in the foreign-based companies that are listed locally. “Foreign IPOs will offer investors a wider choice of investments to tap into as well as enable investors to explore investment opportunities in high-growth foreign investment companies or sectors, such as from China,” says Datuk Yusli Mohamed Yusoff, Bursa Malaysia Bhd CEO. Apart from raising funds from the equity market, Yusli adds that the foreign firms would also have the opportunity to raise capital from the bond market, both in conventional and Islamic instruments. They also have a choice of ringgit and non-ringgit denominated bonds. Foreign firms make IPO market vibrant So far this year, there has only been one IPO on the Main Board, by Samchem Holdings Bhd. The company, which planned to be listed later this month (June), intends to raise up to RM15 million. New listing exercises have virtually stalled worldwide, no thanks to the global credit crunch, and Bursa has not been spared as well. However, the core concern is that the number of IPOs on Bursa has dropped for four consecutive years even before the financial crisis reared its head in late 2008. IPO exercises reached their peak in 2005. That year, 79 companies floated their shares on Bursa, of which 46 were on the Mesdaq Market. In contrast, only 23 companies sought listing in 2008, compared to 40 in 2006 and 26 in 2007, even though the domestic market was experiencing a bull run (see chart). The shrinkage in the number of IPOs, particularly sizeable ones, could indicate that local companies are looking at other alternatives for their growth. Hence, wooing foreign IPOs to Bursa is likely to bring a new lease of life to the local stock exchange. Furthermore, the waiver of the 30% bumiputera shareholding rule is not confined to foreign-based companies. It is also applicable to domestic companies that derive more than half of their revenue from overseas and intend to seek listing on Bursa. Some quarters believe that to a certain extent, this may help encourage domestic companies to list their overseas operations on Bursa, instead of abroad. Concerns about Bursa being a dumping ground Attracting foreign IPOs is a positive and essential move to develop the local stock exchange, which is part of the country’s capital market, into a major bourse in the region. “The listing of foreign companies on Bursa through IPOs is a further step in the regionalisation of our capital market,” says CIMB’s Charon. Nonetheless, there are concerns about the quality of the foreign companies that are heading to Bursa for a listing exercise. Like it or not, the general perception is that the well-run companies will normally float their shares in Hong Kong, which is well known for its stringent listing rules. Only those that fail to meet the requirements in the special administrative region will seek listing elsewhere such as Singapore, and now, Malaysia. The rampant corporate scandals, including accounting irregularities, among Singapore’s S-chips, are seen as evidence that the smaller firms that go easy on corporate governance will float shares further from home (see story on Singapore’s S-chips). On the other hand, there are also worries that stock exchanges, which are also profit-driven listed entities like SGX and Bursa, may be more lenient to foreign firms to list. This has become a subject of debate in Singapore since the SGX is playing a dual role as stock exchange and regulator that approves IPO applications. “We just need to be vigilant in the due diligence process and ensure proper disclosures are made known to the investing public,” Kenanga’s Lee notes. According to Charon, the listing requirements in Malaysia are no less rigorous than those in Hong Kong or Singapore; in some respects, they are even more rigorous. “Our regulators are very focused on the risks associated with foreign listings,” he says. “As part of its review of an IPO application, our regulators would typically undertake a site visit to the company’s premises, and this is also done in the case of foreign IPO companies.” Also, Yusli gives an assurance that despite market-friendly IPO rules, investor protection is the exchange’s highest priority and precedes any other objective. “Swift and strict actions will be taken against any listed company or individual that breaches the listing requirements,” he adds. This article appeared in the Cover Story page of The Edge Malaysia, Issue 757, June 1-7, 2009.
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