According to many financial analysts, China is well-poised to surpass Hong Kong in 2010. According to reports released by both PricewaterhouseCoopers (PwC) and Ernst & Young, domestic companies are expected to raise more funds via Shanghai and Shenzhen IPOs than those in Hong Kong this year. 

The perennial question that underlines the report is whether domestic bourses will seize the IPO crown from Hong Kong this year.   

Local boards power up

A statement made by PwC's China markets leader Frank Lyn in June noted that the China IPO market, especially Shenzhen SME Board and ChiNext, has picked up significantly in the first half of the year, despite the uncertainties on global recovery and market volatility.  

Notably, in a testimony released by the New York Stock Exchange Euronext Group, it was reported that in the first half of 2010 the Shenzhen Stock Exchange listed 161 companies raising US$22.6bn, becoming the number one IPO venue in the world. The regional board took over previous IPO market leaders like the New York and Tokyo stock exchanges, while Shanghai tagged closely behind in the fourth place with a total value raised of US$8.2bn. 

According to Lyn, the boards' good performance demonstrates that Chinese companies are developing well along with the continuing growth of domestic economy and become more mature. Exemplifying this is the long list of IPOs launched on domestic boards in recent months. Industrial Securities (represented by Grandall and AllBright) recently listed on the Shanghai Stock Exchange for US$500m, and Beijing Haohua Energy (represented by Zhong Yin) also listed on the same board to raise US$293m. 

Domestic companies have raised RMB213bn from 176 IPOs in the first half of the year, more than the total (RMB187bn) raised in 2009. According to PwC's predictions, total new listings on the country's two bourses in Shanghai and Shenzhen may reach 300 in 2010, compared to 99 last year.

Wayne Chen, partner and head of capital markets practice at Llinks, attributes investor confidence to the booming local market. "There are many elements that have boosted investor interests in local listings. This includes the increasing listing value, the economic standing of China as a whole and the strict regulations of the China Securities Regulatory Commission (CSRC)," says Chen. 

CSRC has been reputed to be extremely strict with its approval procedures. Chen explains that the authorities now require more than just meeting basic listing requirements, like a review of the status of the company in its industry, according to its peers. Such strict regulations have resulted in the local board being dominated by the top-tier companies, which is both inviting and assuring to potential investors. "This type of confidence, at this time, is a notion that is lacking in investors in international markets," says Chen. 

Yet even with a strong pipeline of deals and relentless investor interest, manoeuvring around concerns about capital market trends and client requests is no easy feat. For both onshore and offshore listings, law firms have to conduct extensive due diligence (capital and asset restructuring) as part of the legal services rendered. Advisors also have to ensure that their clients are compliant with strict CSRC requirements and offshore regulations. 

But lawyers admit that beyond market trends and textbook regulations, there are other difficulties. "Inevitably, some clients will fail to disclose their complete business conditions and this makes it hard," says Arthur Liu, a partner at Jincheng Tongda & Neal (JT&N). "Work has to be redone, and even more comprehensively the second time round to ensure that it is all compliant."

Hong Kong IPO hits a wall

Hong Kong's IPO market - the biggest in the world in 2009 - seems to have slowed significantly in recent months, with several companies shelving their IPOs due to a lack of investor interest. May saw two major Hong Kong IPOs being shelved: Swire Pacific pulled its US$2.7bn plan to spin off its property unit; and Giti Tyre, the largest tyre manufacturer in China, also decided to hold off on its US$500m offering, despite it being its second attempt to get its IPO off the ground. Then in June Chinese wind-turbine maker Xinjiang Goldwind Science & Technology also decided to shelve its US$1.2bn offering because of volatile market conditions.

"The Hong Kong capital market is volatile at this time but we do still have quite a few IPOs in the pipeline. What we don't know whether they will go ahead," says Leung.

More work in quieter times

Despite what seems like gloomy uncertainties underlying the IPO market, lawyers have noted an increased workload that stems from it.

According to Chen there are typically three avenues for companies who are interested in going public, but are concerned about the lack of investor interest during difficult market times.Companies may choose to postpone their IPOs to a later time, to delay so as to change the whole panel list of underwriters, or to halt their IPO plans indefinitely. 

Nevertheless, lawyers confirm they rack up billable hours - across different practice areas - advising clients on pre-IPO and IPO related matters during the wait for more clement market conditions. "In this time, clients will usually seek out other business endeavours like acquiring smaller competitors or make pre-IPO investments to build their business portfolio so as to better qualify in the future," Chen explains.

This is good news for existing IPO advisors as they would usually also enjoy mandates in these transactions. DLA Piper's Leung agrees that a delayed IPO actually increases the client's need for legal services. "When clients finally decide to list, we need to update respective prospectuses," she says. "There are also a lot more documents to execute if a new listing hearing is required."

Issuers like JinkoSolar, who recently launched its US$64m New York IPO, take a different approach. The company first filed for an IPO back in January. But amid tight credit markets and a solar glut, JinkoSolar puts its IPO on hold, citing poor market conditions.What is most interesting is that the initial SEC filing lists Credit Suisse, Oppenheimer & Co, Roth Capital and Collins Stewart as underwriters. A later January filling listed Goldman Sachs and Credit Suisse as underwriters - but the final April filing had Credit Suisse as the sole underwriter.

While Simpson Thacher and Commerce & Finance picked up the work in advising Credit Suisse as sole underwriter, some others have intentionally been dropped via the issuer's decision to dismiss its initial panel. "In difficult markets, there will be longer negotiations between sponsors, underwriters and issuers. And when the issuers feel that its underwriters are incapable of selling
its shares, they might choose to drop them. But this is not common practice," says Leung. ALB

Related Stories:

• Life after Valemus: lawyers ponder volatile IPO market (15 July 2010)
• US firms bolster capital markets practices as HK IPOs surge (23 June 2010)