| SHENZHEN, China, July 2
SHENZHEN, China, July 2 A sleepy fishing village
just three decades ago, the southern Chinese city of Shenzhen
last year hosted more IPOs than New York, Hong Kong and London
combined - averaging one each business day, and unleashing a
gush of fees for bankers, lawyers and advisers.
As equity capital markets have cooled across Asia, the
bustle and high fees in a market just an hour's train ride from
Hong Kong make Shenzhen one of the biggest untapped
opportunities for global banks. While the fees are tempting for
those Wall Street and European bankers who have derided Shenzhen
as a Wild West venue for small, untested firms listing at
sky-high prices, it's the local banks and brokers leveraging
their Chinese credentials that have reaped the benefits.
"It's hard, really hard. It's a local market for local
market participants," said one equity capital markets banker at
a global investment bank, who didn't want to be named as he was
not authorized to speak publicly on the matter.
That may be about to change.
China has unveiled measures to spend $45 billion to create a
"mini-Hong Kong" financial hub in Shenzhen's Qianhai Bay,
leading a drive to internationalise the yuan currency, deepen
ties with Hong Kong and ultimately establish a financial market
on a par with New York or London.
Dan Weil, a 36-year-old American and Hong Kong-based global
head of institutional sales and trading at one of China's oldest
brokerages, Guosen Securities, said the Chinese have
historically struggled to make the most of their financial
strengths and local reach, but are now more competitive.
"For Chinese firms, our competitive advantage is obvious;
this is our turf, our home, we know China, we have deep roots,
we have lots of employees. For the biggest of the big, scale
matters," he said.
WORLD'S IPO CAPITAL
Companies last year raised about $26 billion in IPOs on
Shenzhen's Small & Medium Enterprise (SME) board and on ChiNext,
its Nasdaq-style start-up market - more than double the new
listings on Nasdaq and two-thirds more than London, Thomson
Reuters data show. New York IPOs raised $31 billion, and Hong
Kong $23 billion. Shenzhen boasted 236 IPOs, while New York
ranked second with just 69.
That trend has continued this year, with 84 IPOs in Shenzhen
in January-June versus 44 in New York.
Riding the Shenzhen wave, Chinese securities firms earned
more in estimated underwriting fees last year than the likes of
Goldman Sachs and UBS, which cover all of Asia
Pacific, data show. Ping An Securities earned $232 million in
fees, and Guosen Securities $215 million. Half of the top-20 fee
earners in Asia ex-Japan were securities firms from China.
And that fee gap has widened, with Guosen netting $99
million and Citic Securities $97 million in
January-June, well above Goldman's $63 million in estimated
fees, according to Thomson Reuters/Freeman Consulting. While UBS
topped the first-half estimated fee league table, Chinese firms
took three of the top five slots.
Despite the obvious earnings potential, Western banks have
steered clear of Shenzhen's lofty stock valuations and the
possibility of a bubble pop. The reputational risk for taking
public a company with potential accounting issues is also not
insignificant, bankers said.
"Some of these companies don't necessarily have the track
record of the main board Shanghai-listed companies. It costs the
same to do due diligence in a $50 million deal as in a $5
billion IPO," the ECM banker said.
Illustrating the potential pitfalls, UBS, the top stock
underwriter in Asia Pacific for six of the past seven years, was
canned in the local media over two deals it worked on last year
- a Shenzhen offering by BYD Co Ltd , the
Chinese car maker backed by billionaire investor Warren Buffett,
and a Shanghai IPO by auto distributor Pang Da Automobile Trade
Co Ltd. Shares of both companies tumbled after
FROM FISH TO FINANCE
A small coastal village of just 30,000 people, Shenzhen
exploded soon after 1979 when Deng Xiaoping named it among the
Special Economic Zones set up to foster a new breed of
development in China. It has grown to a metropolis of more than
14 million people with skyscrapers, a modern subway, glitzy
malls and factories making everything from iPhones and high
definition TVs to fake watches and plastic toys.
Shenzhen had no stock exchange until 1990, with activity
taking off after the SME and ChiNext boards were launched. The
number of listed companies has almost trebled from about 500
before the SME board started eight years ago, and the market
value of listed companies soared to $1.2 trillion at end-May.
That's still a lot less than the New York Stock Exchange's
$12.5 trillion, but double the size of Singapore's exchange.
Companies on the Shenzhen Exchange trade at an average 23
times their earnings, down from a frothy 2008 peak of 76 times.
The price-to-earnings ratio - a measure of future earnings
growth - has tumbled to about 39 times from a 2009 high of 128
for companies on the ChiNext board.
"JUST GO UP"
At a retail branch of Guosen Securities in Shenzhen, Liang
Cheng sits in a cubicle at a computer, poring over charts, stock
prices and financial statements in a dimly lit trading room that
feels more like an Internet cafe than a brokerage. Liang, in her
twenties, is one of an army of investors who in a few short
years have turned the Shenzhen Stock Exchange from an obscure
outpost to the world's busiest IPO market.
"You really need to be careful what you're buying now," she
said. "Previously, everything would just go up."
Her assessment of the exchange's risk is an understatement.
The local stock index is down by 21 percent in the
past year, with the index chart looking like shark's teeth, with
sharp gains and sharper falls - making it easy fodder for those
who say Shenzhen is more a casino than a stock market.
Regulators have taken notice and are moving to bolster
confidence in a market where the more than 72 million Chinese
retail investors account for nearly three-quarters of trading
volume. Tougher rules - making it cheaper to trade shares,
easier to de-list underperforming companies and forcing greater
disclosure - could chill new listings, but help
increase deal volumes and fees as sentiment improves long-term.
The Shenzhen bourse is also setting up a joint venture with
Hong Kong Exchanges Clearing Ltd and the Shanghai
Stock Exchange to develop financial products and services and
boost competitiveness as markets become increasingly global.
Global banks including Goldman, UBS, Credit Suisse
and Deutsche Bank, already in China through joint
ventures, have focused on multi-billion dollar IPOs of
state-owned enterprises and large offerings in Shanghai. But,
with most big privatizations now done, growth will come from
entrepreneurs taking their small businesses public.
A batch of global banks were approved to set up shop in
China last year, including Morgan Stanley, Citigroup,
Royal Bank of Scotland and JPMorgan, allowing
them to underwrite and sponsor stock and bond offerings and
offer advisory and investment banking products.
Jerry Lou, head of global capital markets and chief
strategist for Morgan Stanley Huaxin Securities, the local
venture, said small- and medium-sized businesses, which have
been relatively undercapitalized compared to the state-owned
sectors, are leading the charge for capital.
Lou said the venture, based in Shanghai, would work on
Shenzhen IPOs this year, though he gave no specifics. "There
will be ups and downs, but in terms of the absolute potential
for the market to further grow, I could see this market doubling
or tripling in the coming 5-10 years."
But it will be tough for foreign banks to wrestle market
share from entrenched local rivals such as Guosen, Citic, PingAn
Securities and Huatai Securities. Citic has for
years had separate teams focusing just on smaller listings in
Shenzhen, and Guosen has an army of 475 bankers in mainland
China to originate new deals.
Wang Chang Hong, head of equity capital markets at Citic
Securities International, predicts tougher competition as
foreign banks switch on to the Shenzhen story, but believes
Chinese firms will respond to that threat. "The competition will
force us to improve. Probably they will eat into our market
share a bit. But in the end, the local players will win out, so
long as they're willing to adapt, willing to improve."
For Guosen's Weil, home advantage is key for the Chinese
"Shenzhen is no longer just the gateway to Hong Kong. It's
wealthy and there's a lot of money parked there. There's a lot
of high net worth and corporations basing themselves in the
greater Pearl River delta.
"I looked at the opportunities in town and to me it was a
no-brainer; to find the right Chinese firm where I could put in
place best practices and help build something. That's my single
biggest competitive advantage. I have massive reach into China
at a low cost, and that reach is valuable."