Chinese craving for European markets

Booming emerging markets are producing more and more companies keen to IPO – yet local markets often do not have the liquidity, depth of capital or sophistication to cope with the growing demand, forcing these companies to look elsewhere. This in turn is heating up competition between the major bourses of the developed world, which are eager to snap up this lucrative business from abroad.

Take China, which is tipped to overtake the US in 2008 as the world’s largest economy. Many companies there are choosing not to list locally due to the unpredictability of filing with the China Securities Regulatory Commission. ‘Approval is based entirely on the financial performance of the company and on political issues,’ maintains Rolland Long, managing directing of Shenzhen-based broker Vestasia. As Long points out, good companies are not always rewarded by share price – so certain companies might suffer big losses, but their stocks will still go up.

Junjie Cui, in charge of global business development at the Shanghai Stock Exchange, admits that, compared with China’s stock market, rules and regulations in Europe are more mature. Despite this, she does not view European or US markets as a threat. ‘We focus on blue chips, which are encouraged by the government to list locally rather than overseas, while European markets pay more attention to small to medium-sized enterprises,’ she says. ‘NASDAQ has been expanding business throughout China for quite some time and although it has attracted its share of enterprises, we haven’t seen any obvious negative influence on the Chinese stock market.’

For small to mid-cap firms without government backing, there is little hope of a domestic listing: it takes about two years to go public in China even if the necessary conditions are met. Furthermore, local regulators are purportedly trying to cool domestic investment by encouraging banks to lend less.

British, German and French brokers have been busily opening offices in mainland China ever since the costly and time-consuming SOX legislation began deterring Chinese companies from listing in the US.

France
France is a new market for Chinese companies. This, according to Long, accounts for its appeal. ‘As the Chinese are less familiar with the French exchange, there’s no precedent to live up to,’ he remarks. ‘Chinese companies don’t really understand international markets and if they see their counterparts not doing so well on one exchange, they simply look elsewhere. Given that there are already several Chinese companies listed in Frankfurt or London, there’s inevitably more likelihood that some won’t do so well.’

Vestasia listed the first three Chinese companies on the non-regulated Marché Libre section of NYSE Euronext Paris in 2007, in conjunction with Paris-based brokerage outfit EFI. Auto group Lionax was the first Chinese company to list, in August; barely a month later France’s second Asian IPO, of Easson Telecom, had completed.

Long feels the French market provides a good training ground for private Chinese firms learning to become public companies. ‘Around 15 or 20 years ago their owners were all farmers or peasants,’ he says.

Arguably, France is more popular than the UK or Germany because it was the first western country to offer China diplomatic recognition in 1964. Several Chinese leaders subsequently pursued their academic studies in France. The recent merger of the NYSE and Euronext has further helped to boost France’s reputation as a viable market for Chinese companies, as the US has much better visibility in China owing to the predominance of American investment banks.

Despite these promising developments, Long admits it hasn’t all been plain sailing. Xiamen-based containers firm Greating Fortune was set to list on the French exchange in December 2007, as was a Chinese internet company; both IPOs had to be postponed.

‘We struggled to integrate the Chinese corporate structure with NYSE Euronext, which the US and the UK are more familiar with,’ comments Long. Vestasia eventually resorted to listing on the French exchange in a bid to instill faith in its clients.

While Long admits London’s Alternative Investment Market (AIM) is currently faring well, he says Chinese companies are often quite weak at undertaking the substantial amount of investor relations and disclosure required post-listing. ‘Some of them will try their best – carry out the roadshows and raise money, but then try to avoid meeting their investors,’ he says. ‘And then they wonder why western media don’t warm to them.’

Parisian broker Invest Securities has chosen to list its first Chinese company on small-cap specialist market Alternext rather than the Marché Libre. ‘Although it’s much easier to quote companies on the Marché Libre, because there are fewer restrictions, we opted for Alternext as we didn’t want to take any risks,’ comments Claude Bouyer, head of IR activities at Invest Securities. ‘We did a full audit. It’s not easy to promote Chinese companies to the French. In the current volatile market conditions it’s hard for small French companies, let alone small Chinese companies.’

Bouyer is not alone in expressing caution. A source at a major French investment bank tells IR magazine that while French investors are definitely interested in China, they prefer investing directly in China rather than via western markets. ‘France has a fear of the unknown, so I’m not sure how Chinese firms listed on Euronext would work for investors,’ the source adds.

Germany
Another possible listings location is Germany. The Frankfurt Stock Exchange may not have the international reputation of London or the regulatory rigor of US bourses, but it has proved attractive for other reasons. In July 2007 Cologne-headquartered investment bank Sal Oppenheim acted as underwriter for ZhongDe Waste Technology, a manufacturer of waste incinerators and the first Chinese company to list in Frankfurt on the Prime Standard, a segment of the German market designed to offer its members exposure to international investors.

Germany’s manufacturing history was an important pull factor for ZhongDe, says the company’s IR manager, George Lee. ‘The technology we use originates in Germany and Japan,’ he explains. ‘To establish ourselves in Germany gives us an edge over our competitors in the Chinese market, as we have greater exposure to technological advances in the incineration industry.’

Gongyou Group, a Chinese manufacturer of woodworking machines listed on the Open Market in Frankfurt, was also drawn to Germany’s technological expertise. ‘Gongyou makes machine tools, and Germany is the motherland of machine tools,’ says Julian Sandt, a director at Gongyou.

The technological link was beneficial for raising funds, too. ‘Companies working in environmental protection perform well in the Frankfurt market,’ says Carsten Klante, senior vice president of Sal Oppenheim. ‘Frankfurt provides a strong investor base because there is a good understanding of the industry there.’

Not all Chinese groups listed in Frankfurt have been spared from the current volatile market conditions. ‘Chinese companies we came across were put off Frankfurt after seeing how badly mobile phone components group Greater China Precision fared after its first day of listing,’ points out Long.

Chinese telecoms company Vtion Wireless Technology also experienced cold feet. At the end of last year it postponed its planned IPO on Frankfurt’s Prime Standard, attributing the decision to the ‘unfavorable capital market environment’. Its management denies rumors the company is considering an AIM listing instead and maintains it intends to reattempt an IPO early this year.

Staving off competition
Deutsche Börse, the German exchange operator, has spent the last two years working hard to build its reputation in Asia. ‘It has presented a lot of roadshows and marketing events, and after the IPO of ZhongDe – which was one of the most successful in Frankfurt this year in terms of post-IPO performance – it acquired even more interest,’ says Klante.

Deutsche Börse has also been actively promoting Frankfurt as a cheaper venue than its peers. Two years ago it commissioned an independent study by the University of Munich and the European Business School in the UK (updated in 2007) that claims Frankfurt has the cheapest total cost of capital as well as the highest levels of liquidity out of six major international exchanges.

The London Stock Exchange (LSE) rejected the findings of this survey, however. In 2006 it commissioned its own independent research, undertaken by Oxford-based consultancy Oxera, which reported that the total cost of capital in London is lower than that of its main rivals. When questioned about the German research, a spokesperson for the LSE insisted the exchange ‘scores very highly’ on its cost of capital.

With both London and Frankfurt able to back up their claims with independent research, it becomes hard to make a cost comparison between the two locations. But cost does not appear to be the main concern for Chinese firms that come to Frankfurt – Germany’s manufacturing prowess is a greater pull.

When it comes to secondary listings, the UK faces little competition. None of the companies listed on the Shanghai Stock Exchange have dual listings on other exchanges in Europe besides the LSE.

‘Compared with Germany and France, Chinese companies are more familiar with the UK capital market,’ explains Cui. ‘Investment banks, accounting services and other intermediaries have more experience at helping their clients to list in the UK than in Germany and France.’

While Sal Oppenheim predicts another six to eight Chinese IPOs in Frankfurt during 2008, EFI and Vestasia have the ambitious aim of quoting around 150 companies on the French exchange over the next five years, and 300 during the five years after that.

Considering that the LSE boasts around 70 listed Chinese companies, Vestasia will have its work cut out over the next few years, especially given that the US exchanges are hardly keen to hand Chinese companies on a plate to their European counterparts. Both NASDAQ and the NYSE exploited rule changes in December to open marketing offices in Beijing, and the SEC is starting to peel back costs relating to listing in the US.

Despite the competition, however, many international agencies feel that, given the interest of so many Chinese companies in listing overseas, the cake is large enough for several financial hubs across the globe to get a slice.