Hong Kong investors yawn at yuan REIT

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HONG KONG (Dow Jones Investment Banker) – The first-ever yuan-denominated IPO in Hong Kong – for Hui Xian REIT – priced Tuesday, after having received a rather subdued reception from the public. Reasons include a rather aggressive yield, the offer structure for the transaction and controlling shareholder Li Ka-shing’s reputation for leaving little on the table when pricing deals, as well as uncertainties about aftermarket trading and macro market developments.

So while the long-term outlook for offshore yuan equities in greater Asia remains bright, it may take a while for the market to develop.

Hui Xian allocated 2.3 billion units (including the over-allotment option) at 5.24 yuan per unit, the bottom end of the indicative price range, so far raising US$1.6 billion – less than initially expected. While the institutional tranche was reportedly covered on the first day of bookbuilding, and multiple times subscribed upon pricing, the public offer was slow to come together. The 20% retail tranche, double the typical portion in Hong Kong IPOs, was only about 2.5x covered. A claw-back provision to increase that tranche to 40% could therefore not be triggered.

(Click HERE for Hui Xian REIT’s IPO announcement)

The offer price is equivalent to an annualized 2011 yield of 4.26%. While this represents a significant pick up over deposit rates for yuan accounts, the pricing was aggressive when compared with other REITs listed in Hong Kong.

Retail investors have therefore largely ignored the rarity argument for Hui Xian and favored purchases of stocks of existing REITs, for which there is an established, liquid market, without the need to fork out a 1% brokerage fee – not to mention the limitations associated with the exchange and trading of yuan. With the exception of Li Ka-shing’s Fortune REIT, all the property trusts listed in Hong Kong have posted a good price performance over the last month.

One of the prominent risk factors in the prospectus stated that distributions of dividends “may be made in a currency other than yuan due to legal restrictions or other reasons,” and it looks like investors in Hong Kong have indeed overlooked the currency factor.

Unlike IPOs of a similar size – although not unusual for a trust – as a Reg. S transaction only, the deal could not be marketed to onshore institutions in the US. And it also did not include cornerstone investors as a result of the scarcity of yuan available for large investments.

Li Ka-shing’s reputation as an aggressive asset trader, and his recent IPO in Singapore of HPH (Hutchison Port Holdings) Trust, which has remained below the offer price since listing, may also have contributed to the low subscription rate in Hong Kong, even though the billionaire’s aura generally draws out the crowds there.

The biggest factor however appears to have been uncertainty over liquidity in the aftermarket for the REIT, as many institutions and retail investors may not have easy access to yuan to actively trade the securities after listing on April 29.

HKEx’s trading support facility remains at the blueprint stage and may not be introduced until the second half of 2011. The announcement by S&P that it was cutting the US’s long-term credit outlook has also cooled markets in Asia, and dampened investors’ enthusiasm for new issues.

Other issuers’ plans for Hong Kong yuan IPOs, said to include Cheng Yu-tung’s Chow Tai Fook Jewellery Co. Ltd., will probably depend on how well Hui Xian trades over the next few weeks.

Over the long run, the listing and trading of offshore shares denominated in yuan has a bright future, underscored by Singapore’s recent application to become a major trading centre for the currency.

In the meantime, HSBC, as stabilization manager for Hui Xian’s IPO, may perhaps find that the 15% greenshoe could come in handy.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Investment Banker on 20 April 2011 and is reproduced with permission].

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