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Philippines’ faltering stock market throws open the doors



Converge ICT Solutions raised 29bn pesos ($600m) on the Philippine Stock Exchange on Monday in the country’s second largest initial public offering, marking a welcome exception for one of Asia’s most underperforming stock markets.

The offer size — the biggest in the country since 2013 — is rare and the company’s fibre internet service business, which has boomed during the pandemic, is a breath of fresh air for a bourse dominated by old economy companies.

The IPO of Converge, which is partly owned by US private equity investor Warburg Pincus, is only the third in the Philippines this year. It was preceded by retailer Merry Mart Consumer, which raised 1.59bn pesos, and AREIT, the real estate investment trust of Ayala Land, part of the nation’s oldest conglomerate Ayala Corp. AREIT raised 13.57bn pesos.

The PSE’s neighbours have attracted many more companies. As of August, the Indonesia Stock Exchange had 37 listings this year while Bursa Malaysia and Stock Exchange of Thailand had listed 13 and nine companies, respectively. The two stock exchanges in Vietnam, with an economy smaller than the Philippines, have had 11 between them this year — almost as many as the 15 in the Philippines since Rodrigo Duterte became president in 2016.

So, despite having one of Asia’s oldest stock exchanges, the Philippines’ roster of 271 publicly traded companies has remained one of the shortest in the region — and the PSE believes the time has come to catch up.

It recently unveiled plans to amend its listing rules, with an eye on small companies whose growth has been thrown off course by the pandemic that are looking to raise funds for recovery.

Among other proposals, the PSE would waive the market capitalisation requirement for listings on its main board. For the secondary board, a requirement of positive ebitda in two of the three fiscal years before filing would be dropped and the three-year operating history requirement would be cut to two.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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Companies that lack the requisite record but have demonstrated potential, particularly tech-based start-ups, could also go public through a sponsor.

PSE chief executive Ramon Monzon said the proposed rules, which recently went through public consultation, would help revitalise the economy, which slipped into its first recession in three decades following a lengthy lockdown.

“This big brother model is adopted by various bourses in the region and we think that this will also work in our market,” Mr Monzon said, referring to sponsored listings. “There are so many SMEs, even start-ups, with very promising business concepts and models that may still not qualify to list even with our proposed SME Board rule revisions.”

The move sparked excitement from market participants long hungry for more investment choices, but with reservations over whether the new rules will spur companies to list.

April Lee-Tan, head of research at online brokerage COL Financial, said the move would help to lift the PSE’s profile and boost trading liquidity weakened by the pandemic. “Overseas, there are so many options [to invest in]. We’ve been left behind,” she said. “Once you get used to trading in other markets, you don’t want to trade here any more.”

The PSE’s average daily value turnover at the end of August fell to $119m, one of the smallest in the region. Meanwhile, the benchmark Philippine Stock Exchange index has plunged 24.5% this year, one of the steepest falls in the region.

For start-ups, the PSE’s moves open up an avenue for raising capital at a time when the pandemic has dried up private equity funding. “Fundraising for Philippines’ start-ups before the pandemic was already difficult, but the pandemic made it more difficult,” said Francis Simisim, founder of Wi-Fi advertising solutions start-up Social Light.

JJ Atencio, chairman and chief executive of Januarius Holdings, a Philippine venture capital investor, said easing SME listing rules was promising, but he doubted whether tech start-ups had a place in the local stock market. Start-ups take time to become profitable and most collapse, he said.

“You basically sell it to Philippine investors who may not have the money nor time to wait for 10 years,” said Mr Atencio, who has invested in both tech start-ups and traditional SMEs. “It’s too risky for everybody — for the company, the investors and the PSE.”

Current PSE rules are largely tailored for large and profitable companies as reflected in the 500m-peso market capitalisation requirement, which the PSE is proposing to scrap.

But some industry insiders say that apart from the PSE’s strict listing rules, companies balk at the prospect of exposing their books to the public and to the state tax agency.

The Philippines charges a 30 per cent corporate income tax rate, the highest in south-east Asia. A bill endorsed by Mr Duterte seeks to cut that to 20 per cent, which some in the industry hope would lessen incentives to hide real income that has discouraged some companies from listing.

Meanwhile, many of the usual IPO targets are already big and successful family-owned companies that dread dealing with outsiders or being diluted in a public offering.

“A lot of them were already very profitable. They really don’t need money, so that’s why their thinking was: Why will I do the effort of doing an IPO?” said Eduardo Francisco, president at BDO Capital and Investment, which targets five IPOs annually. “They also want to remain low-profile.”

Investment bankers previously courted leading drug retailer Mercury Drug, homegrown pharmaceutical company Unilab and Liwayway Marketing, a snack manufacturer with operations in south-east Asia and China, according to reports. None has announced firm plans to go public in the Philippines.

Mr Francisco doubts whether the proposed listing rule alterations would change the minds of company owners who want to remain private. “These rule changes target companies that really want to list. But for other companies who have long been profitable — even then new rule changes won’t change anything,” he told Nikkei Asia.

Alfred Reiterer, a vocal advocate of greater rights for minority investors in the Philippines, lauded the PSE’s move but hopes the bourse will also finally restrict backdoor listings, which often involve the takeover of a dormant listed company as a way of skirting the IPO process and avoiding scrutiny.

“Relax rules, great. But also increase supervision and minority investor protection,” he said.

A version of this article was first published by Nikkei Asia on October 19, 2020. ©2020 Nikkei Inc. All rights reserved.

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Emerging Markets

Coronavirus latest: Boris Johnson extends lockdown restrictions in England to July 19




New York state has the lowest seven-day average Covid-19 positivity rate at 0.44 per cent, governor Andrew Cuomo said, citing Johns Hopkins University data.

On Sunday, the state health department said 383 new positive cases were identified from 110,437 tests – a rate of just 0.35 per cent.

“We’re beating back Covid-19 across the state and New York has the nation’s lowest seven-day average positivity rate, but it’s going to take more vaccinations to get us across the finish line,” Cuomo said.

The state plans to offer “exciting incentives” for vaccinations, he added.

Cuomo said more than two-thirds of New York adults – 67.2 per cent – now had at least one vaccine dose, and 60 per cent were fully vaccinated.

“I encourage everyone eligible who hasn’t yet been vaccinated to take advantage of a free $20 lottery ticket.”

Scholarships in the State University of New York system and City University of New York were also being offered.

The number of new coronavirus cases tallied in the US has remained near levels not seen since the early days of the pandemic, an encouraging decline that has prompted some states to scale back their daily reporting of Covid-19 trends.

Infections, hospitalisations and deaths related to Covid-19 have dropped sharply since a winter surge, brought down by a vaccination rollout that kicked off in December. 

Overall about 64 per cent of American adults have now received at least one shot, according to the Centers for Disease Control and Prevention.

The US has reported 15,928 infections per day in the week ending June 10, which is down about half in the span of one month and 94 per cent from a January peak of nearly 251,085, based on a Financial Times analysis of figures from Johns Hopkins University.

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Hong Kong-Taiwan spat threatens cross-Strait business




Official representation between Hong Kong and Taiwan is set to end this year as mounting political tensions threaten one of the region’s most important trade and investment relationships.

The number of staff in Taiwan’s representative office in Hong Kong has dwindled over the past two years as the territory has stopped issuing visas, with the documents of those who remain due to expire by the end of November.

Hong Kong also abruptly suspended operations of its representative office in Taipei two weeks ago, ending its official presence there. The stand-off has grown so severe that Taipei has begun making contingency plans for a situation without on-the-ground representation in Hong Kong, two senior Taiwanese government officials said.

The breakdown in relations follows rising military tensions between Taiwan and China and a crackdown by Beijing on pro-democracy groups in Hong Kong that has led some activists in the territory to seek refuge in Taipei.

China claims Taiwan as part of its territory and has threatened to annex it if the island fails to submit to its control indefinitely.

Analysts said that cutting official channels would undermine Hong Kong’s traditional role as a conduit for business and financial exchanges between Taiwan and China. Despite the dispute with Beijing over sovereignty, Taiwanese companies are among the largest foreign investors, employers and exporters in mainland China.

Taiwan air force personnel during the visit by President Tsai Ing-Wen
Military tensions between China and Taiwan have escalated, but investment and trade across the Taiwan Strait remains important to both countries © Ritchie B Tongo/EPA-EFE/Shutterstock

A significant part of trade across the Taiwan Strait trade goes through Hong Kong, and many Taiwanese investors in China also use Hong Kong for financial, taxation and legal purposes. Last year, Taiwan was Hong Kong’s second-largest trading partner, while Hong Kong was Taiwan’s fifth-largest, with HK$504bn (US$65bn) in total bilateral trade. Taiwanese companies invested US$912m in Hong Kong in 2020, while Hong Kong-registered companies invested US$555m in Taiwan.

“Hong Kong has been a springboard for Taiwanese companies into mainland China and it has also been a springboard for Chinese [companies] into Taiwan,” said Liu Meng-chun, a research section director at the Chung-Hua Institution for Economic Research, a Taiwanese government-backed think-tank.

Tensions between Hong Kong and Taipei have escalated over the past two years after the territory started demanding Taiwanese diplomats sign documents declaring their country part of China as a precondition for being issued a visa.

After Taipei refused, the number of staff at its office in Hong Kong began to dwindle, from 20 to eight today, according to the Mainland Affairs Council, Taiwan’s cabinet level China policy body.

Hong Kong, meanwhile, said it was temporarily closing its Taipei office because “Taiwan’s series of actions in recent years has severely damaged Hong Kong-Taiwan relations”.

A Hong Kong government official suggested the suspension came on instructions from Beijing.

“I think Beijing is of the opinion that [Taiwan’s representative office] affects national security,” said Sung Yun-wing, an economics professor at the Chinese University of Hong Kong, who is also a member of a semi-official think-tank, the Chinese Association of Hong Kong and Macao Studies, in Beijing.

“There have been reports that Taiwan has been encouraging the protest movement in Hong Kong, which has turned violent, so the protest movement is not only against the Hong Kong government but also Beijing,” said Sung. He added China was also concerned Taiwan was “sheltering” Hong Kong protesters.

While Taipei has been careful to avoid being seen as making it too easy for Hong Kong dissidents to flee to Taiwan, civil society groups in the country have supported the protest movement with advice, money and logistics. “This is something we cannot interfere with as they have done nothing illegal,” said a senior Taiwanese China policy official.

Historically, Hong Kong’s most important economic role in the Taiwan-China trade has been as a sea and air trans-shipment hub for Taiwanese companies to supply their factories in southern China with components.

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While analysts suggested that much of this commerce could continue even if official ties between Taiwan and Hong Kong were severed, they foresaw a sizeable impact on financial services, tourism and education.

“Hong Kong plays a very important role for Taiwanese private wealth management,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage.

He said many Taiwanese individuals had accounts in Hong Kong, where the local units of Taiwan’s banks offered them offshore investment products not accessible under the island’s stricter regulations.

Liu of the Chung-Hua Institution for Economic Research said many Taiwanese enterprises kept profits from their China operations with their Hong Kong affiliates for tax purposes.

“These things would become a lot more cumbersome without official representation because you would have to start sending documents back and forth for notarisation,” Liu said.

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Nato leaders fret China’s Atlantic ambitions




China’s growing military and economic presence in the Atlantic region is expected to trigger a rare warning from Nato leaders about the potential security threat when they meet on Monday, diplomats said. 

From joint Chinese drills with Russia to western worries that China wants to set up military bases in Africa, the Nato focus reflects China’s primacy among western foreign policy concerns, in particular those of US president Joe Biden.

“This is not about ‘Nato going to China’,” said Claudia Major, a defence analyst at the German Institute for International and Security Affairs. “It’s about ‘China is coming to Europe and we have to do something about it’.”

In 2015, joint military drills with Russia brought the Chinese navy into the Mediterranean and the heart of Europe for the first time. Since then, China has built up the largest naval fleet in the world and invested in critical European infrastructure, including ports and telecoms networks.

“China [through its navy] has come through the Indian Ocean, into the Gulf, up to the Red Sea and they’ve been in the Mediterranean,” according to one British military official, who said China had not yet deployed submarines in the north Atlantic but could do so in future.

“You build nuclear submarines for range and stealth. And China does like to test the boundaries.”

The planned joint statement by the transatlantic security alliance, which diplomats said was still under discussion and subject to change, would be only the second time that Nato leaders have addressed the subject of China head-on. The first was in December 2019, at the insistence of the administration of Donald Trump.

But Biden is understood to be pushing for tougher language than the bland “opportunities and challenges” terminology used that time.

Nonetheless, how to deal with the issue represents a dilemma for the 30-member group, which was originally set up in 1949 to deal with cold war-era threats.

Internally, Nato countries are divided over how to treat China: member Hungary, for one, has good political relations with Beijing.

In addition, there is reluctance to confront Beijing in its own Pacific region — although the UK and France have followed the US in deploying ships to carry out freedom of navigation exercises in the South China Sea.

Chinese and Russian marines take part in joint exercises in China’s Guangdong province
Chinese and Russian marines take part in joint exercises in China’s Guangdong province © Li Jin/Getty

China’s joint military operations with Russia are viewed as a particularly unwelcome development by some Nato members. As well as their annual military exercises, Beijing and Moscow have recently added joint missile defence drills and training for internal security forces.

“Their [the Chinese/Russian] relationship is transactional and pragmatic rather than ideological,” the UK military official said. “But working together in any form provides confidence. And confidence is something we should be wary of.”

As the Center for a New American Security, a bipartisan US think-tank, warned in a January report: “Where Russian and Chinese interests align, Moscow and Beijing could eventually co-ordinate their combined capabilities to challenge US foreign policy.”

Another Nato anxiety is Africa, which China could use to expand its military presence in the Atlantic as part of its long-term goal to become a truly global armed force.

Gen Stephen Townsend, head of US Africa Command, told the US Senate in April that his “number-one global power competition concern” was what he described as Chinese efforts to establish a militarily useful naval facility on Africa’s west coast. “I am talking about a port where they can rearm with munitions and repair naval vessels,” he said.

Experts on the Chinese military said there was no evidence that Beijing was trying to establish such a west African base, yet. However, China has a base in Djibouti and has already used international anti-piracy missions in the Gulf of Aden to train thousands of military personnel and to build military relations with countries outside its usual neighbourhood.

Each time a naval contingent finishes deployment, for example, it typically takes a detour on the way home. Some have visited the Mediterranean and the east and west coasts of Africa.

Another trend vexing Nato allies is the growing involvement of Chinese companies in critical infrastructure in Europe, such as through telecommunications company Huawei.

Chinese state shipping company Cosco also owns a controlling stake in Piraeus, Greece’s largest port, and is reportedly in talks to invest in a Hamburg port terminal.

Such economic ties complicate Nato’s efforts to create a unified approach on China — as do the political relationships between Beijing and friendly European leaders.

That creates the potential for clashes, with the tougher stance of Washington and Jens Stoltenberg, Nato’s secretary-general, who last month warned that China was “coming to us” in areas including cyber space, Africa and the Arctic.

“There is a risk that having this discussion within Nato surfaces very uncomfortable differences between allies on how much China is actually perceived as a threat,” said Sarah Raine, an expert in geopolitics and strategy at the International Institute for Strategic Studies.

“The fact is that there are countries which are seen by hawks as making very pro-China arguments within Nato, at least with regards to being robust but not confrontational.”

Additional reporting by Katrina Manson in Washington

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