After playing second fiddle to Hong Kong for so long, the Singapore Exchange has found its niche. The slew of foreign issuers looking to list on the SGX this year has underlined its growing appeal as a global listing destination.
Source: Reuters/Bazuki Muhammad
Ferrari Formula One driver Fernando Alonso of Spain celebrates on the podium after winning the Singapore F1 Grand Prix at the Marina Bay circuit
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In the battle between the two exchanges, the lines have always been drawn where Hong Kong gets all the China money and Singapore battles to be the regional hub for everything else. Lately, that second role has started to look increasingly useful. As well as continuing to attract listings from all over South-East Asia – and a fair few private sector names from China, too – Singapore is increasingly luring western multinationals.
The most obvious current example is Formula 1, an expected US$2bn IPO. A marquee name in a different sport, Manchester United, is also expected to launch a US$1bn IPO in Singapore when markets are kinder. However, a host of less well-known non-Asian businesses – from Helsinki-listed Cargotec Corp to Middle East-owned Stanford Marine Group – are also considering Singapore because of the institutional and private wealth investor base that can be accessed through the exchange.
This international interest “has been very much a 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 (Bocker) 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 SGX as your listing venue of choice.”
There are two reasons for this – one is market liquidity, more specifically the access to the region’s institutional and private wealth and the other is the broader environment within which Singapore operates.
Private wealth
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 $1.8trn 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.
“However, 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 Triple A rated country in Asia. “There are a number of Triple A rated countries across the world, but they’re a fast-dying breed and it’s something that really resonates with corporations 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.”
Additionally, Singapore has long sought to give issuers and investors what they want. If it is an issue of a tax in the way, they remove it; if it is the lack of a structure, they build one; if there is a need for participants, it goes out there and coaxes them.
Still, this can have mixed results. For many years, a keystone of Singapore’s international approach was to attract second-tier private-sector Chinese companies, which the big state-owned enterprises overshadowed in the Hong Kong market, and stood a better chance of attracting capital at a distance in the city state. These listings are locally called S-chips. Over the years, however, suggestions on what the S stands for have become somewhat less printable. Many of these companies have defaulted, delisted, run into accounting trouble, or simply stopped responding to any of their shareholders. Since the assets of these businesses, in most cases, are in China – if there are any at all – 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 are 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 formats 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.
In ex-Japan Asia, there is no question that Singapore has built the region’s most successful, popular, effective REIT market. As of 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 types, from retail to logistics, commercial to hospitality; and also a range of geographies, with several China-focused REITs, in particular. It is a diversified, well-run market in sharp contrast to Hong Kong’s.
Banking on trusts
“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 tax on dividends.”
However, 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 or not the structure put them at a disadvantage.
Still, both REITs and business trusts respond to the local search for yield – linked to the strength of the private banking community. “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 is much more mature and has a successful history of yield products than Hong Kong.”
It is likely that the Formula 1 issue – when it does come – 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 US dollar dividends (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 terms of aftermarket performance – on average they’re down 20% or so.”
Singapore or Hong Kong?
Still, bankers say issuers need not make decisions based on aftermarket performances of other issues. “When we are 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 Manchester United, and realise all your fan base is in South-East 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 was trading at 9.14 times earnings versus 8.99 for the HSI. “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 Singapore company, or an Indonesian one, 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 do not 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 will see major consolidation between exchanges in Asia.”
However, that does not mean links between them are off the table. “The more likely scenario is for exchanges to co-operate from a trading link perspective. So, there is no reason why you will not be able, through SGX, to trade Thai stocks. That is the way forward: a globalised world with a free flow of capital.”
