IFR Asia: Singapore’s bid for foreign listings

IFR Asia, June 2012

In the battle between Hong Kong and Singapore exchanges, the lines have always been drawn like this: Hong Kong gets all the China money, while Singapore battles to be the regional hub for everything else.

Lately, that second role has started to look an increasingly useful one to have. As well as continuing to attract listings from all over southeast Asia – and a fair few private sector names from China too – Singapore is increasingly attracting western multinationals to list.

The most obvious current example is Formula One, an expected US$2 billion IPO for which bookbuilding is due to commence on June 5; a marquee name of equal standing in a different sport, Manchester United, is also expected to launch a US$1 billion IPO in Singapore when markets are kinder. But alongside them a host of less well-known non-Asian businesses, from Helsinki-listed Cargotec Corp to Middle East-owned Stanford Marine Group, are expected to opt for Singapore, attracted by the institutional and private wealth investor base that can be accessed through the exchange.

This international interest “has been very much part of what Magnus Bocker and the exchange have been trying to promote,” says Keith Magnus, chairman and head of investment banking for UBS in Singapore and Malaysia. “He sees Singapore and the SGX as the Asian gateway, meaning that if you were looking to tap the Asian pool of funds, there is a very strong case to be made that you would select the Singapore Exchange as your listing venue of choice.”

Why? Two reasons. One is market liquidity, more specifically the access to the region’s institutional and private wealth; the other is the broader environment within which Singapore operates.

On the first point, “Singapore has emerged to be one of the most important wealth management hubs in Asia, with the largest institutional investor base of any country in the region,” says Magnus. “We have over $1.8 trillion under management in Singapore: it’s a huge pool of capital.”

It also has a particular cachet. “You can access international investors both in Singapore and Hong Kong; the likes of Capital or Fidelity will invest in IPOs both in Singapore and Hong Kong,” says Tan Jeh Wuan, managing director, capital markets at DBS. “But each market has its own domestic following.

“The general consensus is that Hong Kong is a much larger market, but caters to companies that want more visibility in China or tap Chinese investors,” he says. “Other companies with a more international or South Asian footprint are more likely to consider Singapore.”

In terms of Singapore’s broader environment, one part of its appeal is that it is the only AAA-rated country in Asia. “There are a number of AAA-rated countries across the world but they’re a fast-dying breed, and it’s something that really resonates with corporates when they look at a venue,” says Magnus. “It’s not just because it’s AAA, it’s all the things that come with that: governance, political stability, clarity on the rule of law.”

On top of that, Singapore has long sought to give issuers and investors what they want. If it’s an issue of a tax in the way, they remove it; if it’s the lack of a structure, then they build one; if there’s a need for participants, it goes out there and coaxes them.

This can have mixed results, though. For many years a keystone of Singapore’s international approach was to attract the second-tier private sector Chinese corporates who were overshadowed in the Hong Kong market by the big state-owned enterprises, and who stood a better chance of attracting capital at a distance in Singapore. These listings are locally called S-chips – and over the years suggestions as to what the S stands for have become somewhat less printable. That’s because many of these companies have either defaulted, delisted, got into trouble over accounting, or simply stopped responding to any of their shareholders. Since in most cases the assets of these businesses are in China – if there are any assets – there has been little or no recourse for investors in Singapore. This has not served the exchange’s reputation well.

“We are working on a couple of S-chip issues, but increasingly, given what has happened, investors becoming more selective,” says Tan at DBS. “We are also doing a lot more due diligence on these companies.”

On the structural side, a look at two different structures is illustrative. The more positive story is about REITs. “We have first mover advantage here in terms of the framework for REITs and business trusts,” says Eng-Kwok Seat Moey, managing director for asset-backed structured products at DBS. And in ex-Japan Asia, there is no question that Singapore has built the region’s most successful, popular, effective REIT market. By June 30 2011 there were 26 REITs listed in Singapore, and although new issuance has naturally flagged since, more are expected to follow. REITs in Singapore cover a range of property styles, from retail to logistics, commercial to hospitality; and a range of geographies too, with several China-focused REITs in particular. It is a diversified, well-run market in sharp contrast to Hong Kong’s. “REITs have been a proven way of providing investors with exposure to real estate that is off the development stage and is generating income,” says Magnus. “Singapore probably has the best REIT legislation in the world today. It provides issuers with maximum value for their real estate, and investors appreciate the fiscal transparency and the fact that they are not liable to pay tax on dividends.”

But the other side of the coin is the business trust structure. Initially introduced to attract shipping listings to Singapore, early issues did poorly, before SGX – with great fanfare – attracted the listing of HPH Trust, the Hutchison Whampoa ports business, from under the nose of Hong Kong. It was able to do so through the business trust structure, which at that stage was not permitted in Hong Kong; Hutch liked it because it made it much harder for anyone else to effect a takeover of the trust. But it has performed badly as a stock, and some investors are suspicious about whether the structure disadvantages them.

Still, both REITs and business trusts fit a local love of yield, one that is linked to the strength of the private banking community in Hong Kong. “You can argue that the business trusts haven’t been successful, but if the right product comes along it would still get demand because there is a lot of hunger for yield in Singapore,” says one banker. “Singapore has a much more mature and successful history of yield product than Hong Kong.”

It’s likely that the Formula One issue will bring further innovation to Singapore. At the time of writing, it appears the IPO will be in the form of stapled securities, common in Australia but never attempted on an Asian exchange. Investors will get a share and a loan security, which cannot be traded separately. In another quirk, it will be listed in Singapore dollars but pay a US dollar dividend stream (Singapore now offers a dual-currency platform for listing). Global co-ordinators Goldman Sachs, Morgan Stanley and UBS and bookrunners CIMB, DBS and Santander will be the bankers entrusted with selling this novel approach to the region’s institutions.

Singapore is also benefiting from a change in some of the themes that have previously been to the advantage of Hong Kong. “Hong Kong as an IPO destination has cooled off,” says one banker. “It’s partly about sentiment towards China, and partly about commodities. Hong Kong IPOs have been pretty bad in the aftermarket performance – on average they’re down 20% or so.”

That said, bankers say issuers shouldn’t make decisions based on aftermarket performance of other issues. “When we get asked: Singapore or Hong Kong? We say: it’s not a valuation arbitrage,” says a banker. “You’ll get a similar institutional base in either market. Hong Kong will give you more China money, balanced against Singapore with retail and private wealth. If the core of your business is China growth, like Prada, you should be in Hong Kong; if you’re Man Utd, and realise all your fan base is in Southeast Asia, Singapore makes more sense. What’s important is your business.”

Magnus speaks of “the misnomer that valuations here are lower than in Hong Kong.” For example, at the time of the interview, the Straits Times index is trading at 9.14 times earnings versus 8.99 times for the Hang Seng. “That’s really testament to the fact that the exchange can attract the best investors in the world to buy stocks that are listed here. That’s very positive for issuers. If you are a large cap and want access to truly Asian capital – not purely Chinese-themed capital – SGX can offer you that avenue.”

“If you were a Singaporean company, or an Indonesian company, you would not naturally choose Hong Kong as the avenue because it’s a very mono-centric exchange that is 98% focused on China,” he adds.

Bocker’s vision of a pan-Asia Pacific exchange faltered when his bid for the Australian Securities Exchange failed to navigate Australian politics. Bankers don’t see a similar acquisition on the horizon. “Exchanges here are seen as national flagship institutions,” says Magnus. “I don’t think we are at a level of evolution where we would see major consolidation between exchanges in Asia.”

But that doesn’t mean links between them are off the table. “The more likely scenario is for exchanges to cooperate from a trading link perspective; so there is no reason why you would not be able, through Singapore Exchange, to trade Thai stocks. That is the way forward: a globalised world with a free flow of capital.”