Activity in Hong Kong’s equity market surged on Friday as Calgary-based Sunshine  Oilsands raised HK$4.49 billion ($580 million) from its initial public offering and AviChina Industry & Technology, a Chinese maker of helicopters and trainer jets, raised HK$1.21 billion from an H-share placement.

Sunshine Oilsands’ IPO was bolstered by a $350 million commitment by three cornerstone investors. The company sold 923 million new shares, or about 32% of the share capital. The deal was priced at HK$4.86 per share, which was at the bottom of the price range that extended to HK$5.08 at the top. The offering comes with a 15% greenshoe that could expand the total deal size to about $667 million.

The retail tranche, which was intended to cover 10% of the deal, was undersubscribed. In fact only 2.3% of the overall offering, or 21.39 million shares, went to Hong Kong retail investors, while the remaining 97.7% was picked up by institutional investors, according to a source.

The institutional tranche was allocated to about 50 investors, with demand coming predominantly from Asia. Although there was some North American demand as well, the source said.

Sunshine Oilsands focuses on the development of oil sands leases in the Athabasca region in Alberta, Canada — a province that claims that its oil sands are the third-biggest proven crude oil reserve in the world, after Saudi Arabia and Venezuela.

BOC International, Deutsche Bank and Morgan Stanley were joint bookrunners for the offering. The listing is scheduled for March 1.

Sunshine Oilsands is the biggest IPO in Hong Kong so far this year, exceeding Chinese steelmaker Xiwang Special Steel, which started trading on Thursday last week after raising $171 million from its initial offering. The third-biggest listing year-to-date raised only about $55 million.

Nearly three months into 2012, the global financial markets continue to be dogged by worries about the eurozone crisis. Xiwang ended 19.6% below its IPO price, sending a gloomy signal to other IPOs in the pipeline. The company extended the decline on Friday when it finished down 0.5%, slightly underperforming the 0.1% gain by the Hang Seng Index.

Xiwang’s institutional tranche, which was meant to account for 90% of the offering, was undersubscribed. As a result, retail investors ended up with 16.3% of the deal, while institutional investors took up only 83.6%. This also meant that the bookrunners were unable to allocate the greenshoe, and hence had no way to help stabilise the share price once it started falling.

By comparison, Sunshine Oilsands’ IPO was off to a strong start after it signed up three cornerstone investors. China Investment Corp (CIC), China’s country’s sovereign wealth fund, pledged $150 million, while China Petrochemical Corp (Sinopec) and US-based EIG committed $150 million and $50 million respectively. Based on the base deal size, this translated into 60% of the offering. The cornerstones are subject to a six-month lock-up.

Although Sunshine Oilsands is based in Canada, several of its major shareholders are Chinese corporations. It secured C$450 million ($450 million at today’s exchange rate) of equity proceeds through a pre-IPO investment by a number of prominent investors in June last year, including Bank of China Group Investment, China Life, Cross-Strait Common Development Fund and Orient International Resources.

The IPO price gives Sunshine Oilsands an enterprise value (EV) of 0.46 times the value of its reserves — defined as the combined total of its proved and probable reserves plus its best-estimate contingent reserves (2P+C). That puts it at a slight discount to Athabasca Oil Sands, which is trading at an EV/2P+C multiple of 0.52, according to sources. Athabasca Oil Sands is viewed as one of Sunshine Oilsands’ major comparables together with BlackPearl Resources, MEG Energy and Southern Pacific.

After its 2011 drilling and seismic operations, Sunshine Oilsands evaluated its leases at 3.1 billion barrels of best-estimate contingent (2C) resources and 419 million barrels of proved and probable (2P) reserves. None of its oil sands leases are operational yet, but the company is generating income from the production of heavy oil from its Muskwa property. Management estimates that it will be producing 1,600 to 1,800 barrels of oil per day by the end of 2012, with the first oil sands production starting in 2013.

The company will use at least 93% of the net proceeds to fund the development of oil sands and heavy/light oil projects, while the rest will be used as general working capital for corporate and other purposes.

The IPO comes after China and resource-rich Canada have been strengthening their relationship in recent years.

Athabasca Oil Sands recently announced that it has sold its 40% interest in the MacKay River oil sands project to a wholly-owned subsidiary of PetroChina International Investment, a move that will reportedly give full ownership of such a project to a Chinese company for the first time.

China has good reasons to go abroad in search of energy. While the country’s rapidly growing economy has boosted demand for energy, “Chinese oil fields are ageing, their reserves‐to‐production ratios are low, and domestic oil production is nearing its peak”, the International Energy Agency said in a report last year. In fact, the National Energy Commission has declared that securing energy supply through international cooperation is one of its major focus areas.

AviChina placement
AviChina Industry & Technology’s H-share placement came at a double-digit discount to Thursday’s close and drew far more demand than the initial fundraising plan, allowing the size to be increased beyond the original upsize option.

The deal was done as a private placement in the sense that it could not be sold to more than 10 investors. However, the number of interested parties was said to have been larger than that and, according to a source, priority was given based on order size. The investors included a mix of blue-chip global long-only funds and a few large blue-chip institutional investors that specialise in alternative assets, the source said.

The deal was launched at a size of 196.7 million shares plus an upsize option of 65.5 million shares. However, this was later increased to 342 million new shares, or 17% of the existing H-share capital. The price was fixed at HK$3.55 each, which translated into a 12.6% discount to Thursday’s closing price of HK$4.06.

Another industry source said that the relatively high discount suggests that the company was more focused on raising capital than getting the best price, and was willing to compensate investors for the modest liquidity in the stock. Based on the final deal size, the offering accounted for close to 40 days of trading volume.

The share price has also almost doubled from its 2011 low of HK$2.05 in late September and is up 25% so far this year. However, it still has some ground to cover to return to last year’s high of HK$5.30, which it reached at the end of May.

The proceeds will be used to fund possible acquisitions of aviation assets and for general corporate purposes, according to the term sheet.

The Reg-S offering was launched on Friday morning after the stock was suspended from trading, giving the bookrunners plenty of time to build a decent order book. BOC International was the sole bookrunner and placing agent.

Established in April 2003, Beijing-based AviChina has been listed in Hong Kong since October of the same year. Its main products include helicopters, regional aircraft, trainers, general-purpose aircraft, aero parts and components, and aero-mechanical and electrical instruments.

The company’s principal shareholders include Airbus parent European Aeronautic Defence and Space Company (EADS), as well as Chinese companies such as Aviation Industry Corporation of China (AVIC), China Hua Rong Asset Management, China Cinda Asset Management and China Orient Asset Management.

EADS, which owns 5%, has made it clear that its stockholding will not be diluted after the transaction, the first source said, indicating that the company bought shares in the placement.

AviChina has cooperated with EADS’s unit Eurocopter on its EC120 series helicopters and Agusta of Italy on its CA109 series, as well as working with Sikorsky of the US to make parts and components for its S92 series.

AviChina has also provided 20% of the investment into a final assembly line for A320 aircraft in Tianjin.

In a similar move, the Chinese aviation company raised $147 million from a fully-underwritten H-share placement in March 2010, which was also led by BOCI on a sole basis. That deal comprised approximately 334.6 million H-shares.

Vietnam was one of the best performing markets in January. Is it simply because it’s off a low base? And do you think it will continue?
Keep in mind that 2011 started with rapidly rising inflation and expectations that the state bank would hike interest rates, which they did aggressively. Not surprisingly, markets crashed as financing became scarce. Inflation peaked in September, but then markets became oversold as fears that banks wouldn’t be able to cope with rising non-performing loans (NPLs) led to panic selling.

This year started with the realisation that inflation is definitely under control. Consensus puts year-end inflation at 10% to 12%, less than half its 2011 peak, driving expectations of drastic interest rate cuts throughout the year. While NPLs are still an issue, large banks (which account for roughly 80% of Vietnam’s lending) seem to have plenty of liquidity and we find that liquidity issues are concentrated among the small banks, which the State Bank of Vietnam is officially looking to merge. This gave markets a sense that the fear was somewhat exaggerated. International press is now increasingly favourable to Vietnam and foreign interest has increased on the back of historically cheap valuations. Retail investors, which drive the market in Vietnam, are increasingly interested in putting money to work in the stock market, especially as physical real estate hasn’t bottomed yet.

Are there any concerns that inflation won’t reverse — and start creeping up again as the overall economy improves?
There are some concerns that inflation could be higher than expected, but the risks seem distant. The main drivers of inflation in the past few years have been, in no particular order: world commodity prices, a weak local currency and domestic credit growth.

If you think about world commodity prices, with global growth looking dim they seem unlikely to rally again this year.

The local currency has been stable during the past nine months thanks to a BOP [balance of payments] surplus and any concerns of an immediate and abrupt devaluation are remote in our view.

Domestic credit growth is set by the State Bank of Vietnam at 17% for the year, 40% higher than that of 2011 but well below the five-year average of 35%. Our view is that a credit growth above 15% is inflationary, so we could see modest inflationary pressure towards the end of the year, but nothing to be overly concerned about unless credit growth targets are exceeded.

Other factors to take into account include higher utility prices as Vietnam looks to remove subsidies on electricity and water and increase prices by 15% to 25%.

All the above factors have been taken into account to come up with our inflation target of 12% by year-end. Consensus is in the 10% to 11% range, less than half its 2011 peak — and interest rate cuts are expected to be announced in early April.

You have said to me in the past that Vietnam is the country in the region with the least headwinds from slowing growth in the rest of the world, but it’s still an export nation, so why is that?
If we look at the composition of Vietnam’s exports, the bulk is still low value-added goods like garments, shoes and accessories, and agriculture-related commodities. Our view is that these goods face rather inelastic demand and aren’t as much affected by a global slowdown as, say, electronics and other more valuable goods that the rest of the region exports. Moreover, anecdotal evidence from exporters of low value-added goods to markets like the US and Europe indicates that demand is expected to be stronger in 2012 than in 2011, in part because China is becoming increasingly expensive. If you look at the data, many of Vietnam’s regional peers already see negative export growth, while Vietnam still enjoys strong positive growth, albeit off the 2011 peak on a year-on-year basis.

What sectors should investors focus on when looking at Vietnam?
It’s usually better to be bottom up than top down in a market like Vietnam, but generally speaking, the consumer sector (goods and services) remains our top choice as many companies are cash rich and enjoy 20% to 40% organic growth in what are still underpenetrated markets. We also like commodities like sugar and fisheries, as well as companies around the rice trade (fertilisers, irradiation etcetera). Finally, we like selected companies in the banking and the industrial sectors.

What should they avoid?
We remain bearish on the real estate sector as a whole. Years of boom (until 2008 that is) brought about an oversupply of costly commercial and residential projects targeted at a high-end segment that never had real demand. Still today, projects started in 2007 are being completed, but many more are abandoned. We haven’t seen projects being sold at distressed prices yet and we don’t expect to see that happen later either.

At one point, however, the best returns will be in the real estate sector. When current projects are relatively well absorbed, monetary policy is loose and financing for the sector becomes more abundant (it’s very scarce at the moment), this will be the sector to be in, maybe as we get closer to the end of the year.

Small businesses seeking loans from traditional sources struggle to secure the amounts t hey need or deserve. Bank underwriting standards are still high, and the bank regulatory environment is expected to remain stringent. This makes it difficult for many small businesses to qualify for bank financing. With demand for loans high and increasing, this has created an opportunity that is being filled by non-bank lenders and alternative debt funds.

Small businesses have very individual needs while traditional banks try to fit the small-business customer into one of their traditional business loan products, rather than tailor their products to meet the needs of their small-business customers. This has created new opportunities for non-bank lenders capable of designing flexible financing options for these clients.

Why Non-Bank Lender Are Increasing Their Market Share

Non-bank lenders have the following advantages:

• They typically offer financing products that may not be available at a bank.
• They tend to be more responsive to the real needs of small businesses.
• They are less restrictive as to what types of businesses qualify, and can work around high loan-to-value, poor credit rating, or recent losses.
• They are often able to amortize loans, at competitive rates, over a longer period than a bank

Today’s New Challenges for Small-Business Owners

With so many more players joining the alternative funding space, the small-business lending marketplace has become even more fragmented. Non-bank lenders come in all shapes and sizes, and they tend to focus on a particular kind of lending or asset class only. Finding the right lenders, and then engineering the best possible financing between them, can be challenging.

To secure optimal financing quickly and efficiently, it’s best to get advice from a small-business lender and lead arranger who understands the fragmented marketplace. Atticus Financial Group along with Viridian Leasing Inc, a leading small-business lender, specializes in structuring and securing optimal financing for a small business like yours either directly from their balance sheet or in coordination with other lenders. The firm’s extensive relationships with both banks and non-bank lenders allows it to bring the most appropriate financing structure to your small business.

Hong Kong’s stock exchange is making a slow but steady push to become a listing venue for global mining companies, even though it is a sector with a rich seam of broken dreams. In the past, mining companies — especially those in the development stage — were restricted to specialist listing venues such as Toronto or Perth, where the exchanges themselves had sophisticated means of assessing the value of the projects being listed.

But as the commodity boom rumbles inexorably on and miners became majors, they have shifted to larger, global exchanges such as London. The recently announced merger between Glencore and Xstrata is the latest move in the maturation of a sector that was once considered extremely high risk.

HKEx is acutely aware of these trends, but its ambitions to become a global venue for mining stocks are clear. It also realises that these stocks can be extremely volatile — and with the Hong Kong government sensitive to retail investors losing money, it has taken a cautious approach to allowing such companies to list.

One such example was IRC, which was spun out of UK-listed but Russian-focused mining company Petropavlosk in September 2010. The stock is up some 40% so far this year, although it is still some 20% off its IPO price.

“The HKEx is extremely good in how it looks after retail investors,” said Peter Hambro, chairman of Petropavlosk, speaking on the sidelines of the Troika Dialog Russia Forum in Moscow last week. “When it took on the listing of mining companies it took a long time.”

Petropavlosk still owns 65.5% of IRC, which is run by Hambro’s son, Jay. Mining companies may be unfamiliar in Asia, but such governance structures are not.

The current trend in listing venues is that they should reflect not only where companies can get the highest valuation, but also where their customers are. Also speaking at the Forum was Ivan Glasenberg, the CEO of Glencore, on the day that the merger with Xstrata was announced. He said that it made sense for the company to have a secondary listing in Hong Kong as China was consuming 50% of the world’s commodities. But on a per capita basis, the Chinese only consume 16% of the world average when it comes to aluminium and 25% of the average consumption of oil. China is already the biggest player in the global commodities market — and it is getting bigger.

Being close to customers clearly makes sense from an operational point of view, but increasingly companies are looking for both customers and shareholders to be close.

“Most of the companies listed in Toronto are operating in that timezone,” said Hambro. “But as we are seeing the Chinese population becoming more financially educated, that means demand for this type of investment [mining stocks] will grow.”

Other global miners such as Vale from Brazil, Kazakhmys from Kazakhstan and South Gobi Resources from Mongolia, have already joined Glencore in taking a secondary listing on HKEx. They join Chinese miners such as Zijin Mining, Zhaojin Mining and Yanzhou Coal, which have primary Hong Kong listings.

Such listings give mining companies the acquisition currency for deals up and down the supply chain. And if Asian investors will buy this stock, the mining companies are only too willing to sell it. “All commodity traders — if they want to buy assets — need to list in order to get permanent capital,” said Glasenberg. “Otherwise they run out of cash when their partners leave. Being public gives you a lot of flexibility and firepower, and I like it.”

Speaking about Petropavlosk’s gold mine in the Amur region of the Russian Far East, on the border with China, Hambro said: “We are financing the mine from China and we are building it with Chinese labour. We have a symbiotic relationship with China.”

It remains to be seen if Chinese investors are willing to have a similarly symbiotic relationship with the miners.

China’s securities regulator is planning to expand the RMB qualified foreign institutional investor (RQFII) programme to accelerate the opening up of domestic capital markets to overseas investors, its vice-chairman Yao Gang told the Asian Financial Forum yesterday.

The RQFII scheme was introduced last month to permit Hong Kong subsidiaries of Chinese fund companies and securities firms to raise renminbi offshore and invest back into the onshore securities market.

An initial quota of Rmb20 billion ($3.1 billion) was announced to be shared among firms approved for a licence, and already this sum has been allocated in full to 21 companies.

And at the forum Yao Gang affirmed that the China Securities Regulatory Commission (CSRC) is intent on expanding the programme.

Ben Zhang, joint managing director of Hai Tong International Asset Management, predicted the CSRC would unveil a second batch of RQFII quotas within six to nine months, with an amount exceeding the previous Rmb20 billion.

Having launched an offshore RMB fixed income fund only yesterday, Doris Lian, CEO of Da Cheng International AM, points out that expansion of the RQFII scheme will stimulate further growth in offshore RMB deposits, generating a need for more RQFII investment products.

CSRC’s efforts to push forward the RQFII programme are in line with Beijing’s drive to increase overseas investment this year and improve the structure of the domestic capital markets, including greater participation from institutional investors.

During a securities and futures regulatory meeting on January 9, CSRC chairman Guo Shuqing indicated plans to quicken the approvals process for qualified foreign institutional investor (QFII) licences and increase investment quotas, and at the same time enlarge the RQFII scheme.

And last weekend Dai Xianglong, chairman of the National Council for Social Security Fund (NCSSF), urged incremental expansion of QFII investment quotas and the eventual removal of quota restrictions.

He suggested that China learn from the experiences of other countries such as India in terms of opening up their domestic stock market to foreign investors and gradually increasing QFII investment quotas until the restrictions are finally abolished.

Close regulatory restrictions on foreign institutional capital could be replaced by the establishment of caps on each institutional investor’s holding of individual stocks, and that could be executed automatically in the trading process, Dai notes.

According to CSRC’s latest disclosure on December 13 last year, a total of 121 foreign institutions have obtained QFII licences. Korea’s National Pension System is among the latest batch to receive a licence

The biggest threat to China’s economy in 2012 is a lack of timely and thorough reform of the financial market and political system, Chinese government officials and business leaders concluded at the Asia Financial Forum in Hong Kong yesterday. This year is likely to be challenging for the world’s fastest-growing economy. As uncertainties in global markets and weakening demand from Europe and the US erode exports, so China needs dynamic systems to ensure its resilience during the economic downturn. However, the government tends to respond to crises with short-term stimulus policies rather than “deep reform”, the panellists agreed, arguing that more fundamental changes are needed. There is no shortage of theories about what may cause China’s economy to suffer a hard landing. Foreign observers typically identify risks such as rising property prices, stubborn inflation and weakening exports, but China’s elite seemingly have very different concerns. Tu Guangshao “China needs deeper reform in its financial sector,” Tu Guangshao, vice-mayor of Shanghai, said at the panel. “It should reduce government interference in the financial market and liberalise the renminbi interest rate and exchange rate market.” Tu, who is the former vice-chairman of the China Securities Regulatory Commission, said the lack of reform is the biggest obstacle in Shanghai’s development as an international financial centre, however, he is confident that the city will achieve that goal in 2020. John Zhao, senior vice-president of Lenovo Holdings, also argued that a lack of financial reform has stood in the way of many opportunities, and complained that China had failed to mobilise its capital reserves. “China is changing its role from the world’s factory to the world’s market,” he said. “We often see cash-loaded Chinese corporate and individual buyers shopping around the globe, but there are not enough investment channels at home.” Zhao said that China has many very promising private businesses that could provide good investment opportunities, but in times of difficulty, government policies always favour state-owned companies ahead of private businesses that could probably use the financial aid more efficiently. An underdeveloped financial market at home and restrictions on investing overseas, along with a negative interest rate and volatile stock market, have left Chinese people with few investment options besides the property market — but housing prices have been falling for several months and will fall a further 15% to 20% in big cities this year, according to Deutsche Bank forecasts. Tomson Li, chairman and CEO of TCL Corporation, who also took part in the panel, agreed that China should encourage investment in the private business sector. He also said that China still enjoys much advantage as the world’s factory because it has the best infrastructure in any emerging market. The head of China’s giant home-appliance exporter said the country’s export growth will slow down in 2012, but will still stand above 10% as made-in-China goods are still competitive. He estimates last year’s export growth was around 13%. The panel agreed that rising social tensions are also a threat to the economy, but it doesn’t appear to be an imminent one.