Chinese tech stars Alibaba, JD fuel convertible bond surge, likely 'precursor' to IPO rush

A recent boom in convertible bond sales is kindling hopes that Hong Kong's capital market is warming up after a years-long chill, with Wall Street banks readying themselves to bask in the glow.

A combined US$10.5 billion in convertible bond offerings by Chinese tech leaders including JD.com, Alibaba Group Holding, Trip.com and Lenovo Group has swept the market in the past two weeks. As a result, total convertible bond issuance in Asia, excluding Japan, is on track to match 2023's total of US$13.5 billion, according to data compiled by LSEG.

Hedge funds piled into Alibaba's US$5 billion issuance - Asia's largest-ever convertible bond transaction and the world's biggest since 2008 - making the public deal more than five times oversubscribed. Alibaba owns the Post.

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Bankers said they have not seen the market this busy since 2021 when the homecoming of Chinese-American Depository Receipts boosted the initial public offering (IPO) market and US-China accounting disputes and geopolitical concerns had yet to cast a pall over the market.

More deals are in the works, they said.

"Some of the recent deals have had levels of oversubscription that we saw at the peak of the market in 2021," said Saurabh Dinakar, co-head of Asia-Pacific global capital markets at Morgan Stanley. "The convertible bond issuance surge is certainly a big boost for investor confidence and issuer sentiment."

A convertible bond is a debt-like instrument that pays interest and includes an upside call option to convert into the underlying stock. It can help issuers reduce financing costs compared with traditional bond sales when interest rates are elevated, while also providing investors with equity upside potential and downside protection.

Doing a "jumbo-sized" convertible bond sale and using a portion of the proceeds to fund a concurrent stock buy-back is front of mind for a lot of Chinese issuers after witnessing recent successful cases, according to Rob Chan, Asia-Pacific head of equity-linked origination at Citigroup.

"Despite having cash available, if they are able to sustain more leverage on balance sheets, issuing a convertible at current low costs provides better capital efficiency," Chan said. People are coming to terms with the idea that rates will stay higher for longer, and this is sparking more conversations with companies thinking about using convertibles, he added.

Food delivery platform Meituan, which announced a US$2 billion stock repurchase plan on Wednesday, is reportedly working with Bank of America and Goldman Sachs on a convertible sale, according to Mergermarket. Some tech companies in Taiwan and Australia are also getting more active in the space, and even companies in more traditional sectors in Southeast Asia are considering similar moves, according to Chan.

Hong Kong's initial public offering market could get a boost from rising sentiment, Morgan Stanley banker says. Photo: Yik Yeung-man alt=Hong Kong's initial public offering market could get a boost from rising sentiment, Morgan Stanley banker says. Photo: Yik Yeung-man>

From the investor point of view, economic recovery expectations for mainland China are driving interest in convertible bonds. "Convertible bonds are extremely attractive to buy into if one believes that China and the macro environment provide potential upside," said Chan.

The surge in convertible bonds is also a shot of confidence for overall market sentiment. Investors have accumulated "a fair bit of dry powder" over the past two years and are now looking to deploy this for the right opportunities, said Morgan Stanley's Dinakar, adding that a continued level of health in the markets for follow-on and convertible bonds should bode well for IPOs.

"Our hope is that this would be a precursor or a preview for eventually the IPO market to come back," he said.

Funds raised by new listings on the Hong Kong stock exchange fell 32 per cent in the first half of the year to HK$12.1 billion (US$1.55 billion) year on year, according to an estimate by EY on Thursday. But the market now shows signs of a nascent recovery. For example, public investors oversubscribed Tencent-backed artificial intelligence drug researcher QuantumPharm's IPO by 103 times before its listing on Thursday.

Insurer FWD Group Holdings is keeping "a close eye" on market conditions amid speculation that its owner, the tycoon Richard Li Tzar-kai, wants to revive his Hong Kong IPO plan, which could value the company as high as US$9 billion.

"In general, we are optimistic about the prospects for 2024," Dinakar said. "There's a good pipeline in Australia [and] India, and it's great to see China come back."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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