Companies

Goldman, UBS take backseat in Shenzhen

By Eva Woo (China Daily)
Updated: 2010-09-16 11:38

BEIJING - Goldman Sachs Group Inc and UBS AG are missing out on Chinese initial public offerings (IPOs) as local investment banks lead record numbers of small companies to sell shares in Shenzhen.

China accounts for a third of the $150 billion raised worldwide in IPOs this year, yet the average deal size has shrunk as companies rush to list on Shenzhen's ChiNext startup board introduced in October. Goldman Sachs, ranked first in overseas IPOs by Chinese companies, has expanded its local investment-banking unit's workforce by about 40 percent in 2010 as it moves to target smaller domestic offerings.

"We are going to put more focus on ChiNext IPO deals," Thomas Deng, head of China equity capital markets at New York-based Goldman Sachs, said in a Sept 8 interview. "Our pipeline has traditionally been mostly big deals, or at least that's the perception. This may change."

Companies have raised 358 billion yuan ($53 billion) in first-time sales in Shanghai and Shenzhen since Jan 1, putting this year on track to overtake 2007 as the biggest for local IPOs, according to data compiled by Bloomberg. Goldman Sachs hasn't worked on any such deals. UBS, in 18th place overall, ranks first among foreign investment banks in underwriting yuan-denominated IPOs after advising on one offering in 2010.

UBS was third in 2007, when the average IPO was more than twice as large, and Goldman Sachs was No 7, Bloomberg data show. Joanna Sin, a spokeswoman for UBS Securities Co in Beijing, declined to comment.

China started the ChiNext board in October to spur stock sales by smaller companies. ChiNext has looser listing requirements than China's two main boards, including a less stringent demand for profit history. ChiNext and Shenzhen's six-year-old board for small and medium-sized companies have dominated first-time sales in China this year, accounting for a combined 227 of the 241 deals.

ChiNext deals have been less rewarding for investors: The board accounts for six of China's 10 worst-performing IPOs this year and just one of the 10 biggest gainers, Bloomberg data show. Credit Suisse Founder Securities Co is the only overseas-backed firm to underwrite a ChiNext offering in 2010.

Foreign investment banks are racing to set up local ventures so they can arrange stock and bond sales in China, which Goldman Sachs predicts will overtake the US in equity market capitalization by 2030. A tie-up with a local partner is a prerequisite for overseas securities firms to do underwriting in China.

The two biggest domestic companies also suffered this year. China International Capital Corp and Citic Securities Co, the dominant IPO underwriters in China in the past decade, saw their combined market share shrink to the lowest since 2005 as deals got smaller, Bloomberg data show. They still rank first and second after advising on Agricultural Bank's sale.

Overseas companies tend to pay more than their local rivals and have fewer bankers, limiting their ability to chase small deals, said an executive at an overseas investment bank who declined to be identified.

"When it comes to smaller deals, the big global banks do not have more advantages than local ones, for both cost and cultural reasons," said Yu Huan, vice-general manager at Soochow Securities Co, based in China's eastern Jiangsu province. "They tend to cherry-pick deals and favor the bigger clients. It's a matter of choice."

Ping An Securities Co and Haitong Securities Co are among this year's winners, reaching their highest IPO ranking since at least 1999 in fourth and fifth place respectively, Bloomberg data show.

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UBS Securities worked on the 4 billion yuan IPO of Jihua Group Ltd, a maker of munitions for the Chinese military, in August. Zhong De Securities Co, one-third owned by Deutsche Bank, has arranged four deals worth a combined 2.9 billion yuan, putting it in 27th place, according to Bloomberg data. Fortune CLSA Securities Ltd and Credit Suisse Founder Securities are 19th and 42nd respectively. Smaller, privately owned companies going public after two decades of State-owned enterprises selling shares may drive a shift in investment banks' strategy.

UBS Securities has 20 qualified sponsors, putting it in 25th place among the 71 companies that can underwrite local IPOs by that measure, the China Securities Regulatory Commission said on Sept 3. Goldman Sachs Gao Hua ranked 40th with 11 sponsors.

Guosen Securities Co employs the most such professionals with 113, the regulator said. The Shenzhen-based company has worked on 21 IPOs in China this year, trailing only Ping An Securities by deal count, Bloomberg data show.

Bloomberg News