General Motors returned to the US stock exchange in November when the US government sold half of the car company for US$23.1 billion (A$23 billion), in what was the biggest-ever initial public offering (IPO).
The General Motors float was atypical, of course, because it involved relisting a household-name giant founded in 1908 that had sought bankruptcy protection 17 months earlier. It almost served to show how traditional IPOs — when a fledging company seeks capital to pursue a promising niche — are less prevalent on Wall Street these days. For all of 2010, just US$48 billion was raised via IPOs in the US compared with US$87 billion in 2007, according to Bloomberg data. A combination of company collapses, takeovers and a decline in listings has seen the number of stocks listed on the US’s major exchanges drop to 4,048 from a peak of 7,459 in 1997, according to The New York Times.
If investors are wondering where the IPO action is these days, the answer is Asia.
More than 850 IPOs in Asia Pacific ex-Japan last year raised a record US$164 billion — 58 per cent of the world’s total in terms of value. This was an increase of 248 per cent from 2009 in dollar terms and well clear of the previous record of US$93.3 billion set in 2007. The record-breaking amount of IPOs in Asia in 2010 meant that US floats were reduced to just 17 per cent of the world’s total for last year.
While there’s no direct correlation between gross domestic product growth and the performance of stock markets, Asia is ripe for IPOs because it’s so much easier for companies to expand revenue and profits in booming economies. Developing Asia is expected to have expanded 9.4 per cent in 2010, compared with US expansion of 2.6 per cent. Low yields on most government bonds (US 10-year yields are near their lowest in 50 years at around 2.5 per cent) and even high-yield debt (below 4 per cent) makes the promise of these returns even more enticing for foreign investors.
According to Bloomberg’s analysis, investors paid 24 times 2011 earnings to participate in Asian IPOs in the first 10 months of 2010, twice the average for US equities because revenues for newly listed Asian companies are forecast to increase five times as much.
It’s no surprise that Asian IPOs have surged about sixfold since 1999, just two years out from the Asia crisis, when the region accounted for 12 per cent of IPOs by market value worldwide.
Investors in emerging Asian IPOs received an average return of 42 per cent by year-end from the first day shares were offered, according to Bloomberg. The average return from the day of listing until year-end was 6.5 per cent.
Investors in IPOs in developed Asia countries (including Pacific countries such as Australia) received an average return of 27 per cent by year-end from the first day shares were offered, according to Bloomberg. The average return from the day of listing until year-end was 11 per cent.
China and India big contributors
China accounted for more than half the IPOs in Asia in 2010 by market value, raising US$70 billion from about 340 issues last year, compared with only US$28 billion in 2009.
The biggest IPO in China (and Asia) last year was the Agricultural Bank of China, which sold shares worth US$22.1 in Shanghai and Hong Kong in August in what was, until the General Motors comeback, the world’s biggest-ever first-time share sale. The previous world record was held by the Industrial and Commercial Bank of China, which conducted a US$21.9 billion share sale in 2006.
Investors in Chinese IPOs received an average return of 47 per cent by year-end from the first day shares were offered, according to Bloomberg. The average return from the day of listing until year-end was 8.7 per cent.
Indian companies raised US$9.2 billion in 2010, to eclipse the previous record of US$8.2 billion in 2007. The biggest listing was the government sale of 10 per cent of Coal India, which was formed out of the nationalisation of India’s coal fields in 1973. The IPO reaped US$3.4 billion from investors, after being 15 times oversubscribed.
Coal India was the first of eight sales of government stakes planned by the end of the first quarter. India’s government is considering forcing government companies to sell at least 25 per cent of ownership if they list.
Investors in Indian IPOs received an average return of 12 per cent by year-end from the first day shares were offered, according to Bloomberg. The average return from the day of listing until year-end was negative 9.6 per cent.
Southeast Asia’s largest-ever IPO occurred in November when Petronas Chemicals, a unit of Malaysia’s state oil company, raised US$4.1 billion. The float is part of a government plan to attract more foreign investment by selling state assets.
Most of the record-setting IPOs are government assets, whether they are in Asia or the US. While a few big IPOs receive the most attention, it’s among the smaller ones that investors will most likely find the companies that have the potential to be as successful as General Motors was in its heyday.
Michael Collins is an investment commentator at Fidelity.
