More international companies look to Hong Kong for a listing

Hong Kong has been quiet in terms of new listings so far this year. Six companies have completed initial public offerings, but together they have raised only $247 million and the largest deal was only about $90 million. But bankers say they are confident that 2011 will be another blockbuster year for Hong Kong in terms of equity volumes overall and stress that IPO pipelines are looking very similar to those a year ago.

One theme that began last year and is expected to gather pace this year is the listing of international companies in Hong Kong. And while this is perhaps not the trend that will make 2011 another record year for new listings, there is clearly a lot of buzz surrounding it right now and bankers claim to be having ongoing discussions with numerous companies that are pondering a listing in Hong Kong.

Already, Italian fashion designer Prada has confirmed, through a statement in late January, that it is aiming to list in Hong Kong this year, following several months of speculation to that effect. The Milan-based company said it has mandated Italian investment banks Intesa Sanpaolo and UniCredit together with CLSA and Goldman Sachs to help arrange the deal.

And, earlier in the same week, sources said that Glencore International, the world’s largest commodities trader and the owner of a controlling stake in Swiss mining company Xstrata, is seeking to list in Hong Kong and London, with the primary listing set to be in Hong Kong. The company, which has an estimated equity value of $50 billion to $60 billion, has mandated Citi, Credit Suisse and Morgan Stanley to help arrange the IPOs that are currently targeted for the second or third quarter.

These two listing candidates are perfect examples of the types of companies that are expected to lead this trend – branded consumer product companies, and commodities and resources companies. The former are looking to tap into their growing customer base in Greater China and Asia as potential investors as well as buyers of their clothes, handbags, cosmetics, or whatever, while the latter are typically seeking to establish a stronger link with China as the country’s demand for commodities grows.

Russian aluminium producer United Company Rusal, which last January became the very first non-Asian company to list in Hong Kong, set the ball rolling in terms of commodities companies, and while its $2.24 billion IPO wasn’t exactly smooth and the share price took almost 10 months to edge above the IPO price, it did prove that the Hong Kong market is deep enough to absorb non-Chinese companies. It has since been followed by a few other non-Chinese commodities plays, primarily mining companies, including IRC Limited, a London-headquartered iron ore company with mines in the Russian regions bordering China; Canada-based coal miner SouthGobi Energy Resources, which has all its assets in Mongolia; and Mongolian coal miner Mongolian Mining Corp.

In December last year, Brazil’s Vale, the largest iron ore producer and second largest diversified mining company in the world, also started trading in Hong Kong although it listed through an introduction, meaning it didn’t sell any new shares.

So far, Hong Kong has seen only one consumer products company list – French cosmetics and skincare brand L’Occitane International, which raised $787 million from a highly popular IPO in late April last year. That deal, which priced at a premium to global peers like l’Oreal and Estee Lauder and traded well in the aftermarket, sparked a lot of interest among other global brands in a Hong Kong listing and, while it may be too strong to say that L’Occitane was a “trigger” for the discussions that are currently underway, it certainly helped make other potential issuers more comfortable with the idea of a Hong Kong listing.

Aside from Prada, other global brands supposedly considering a Hong Kong listing include: Samsonite; Moncler, a French designer of high-end down jackets and sportswear that is 48% owned by the Carlyle Group; and Yum Brands, the US fast-food giant whose brands include KFC, Pizza Hut and Taco Bell.

Indeed, some bankers expect consumer products companies, rather than commodities companies, to be the major driver in terms of non-Asian listings.

“I see the dotted lines connect quicker with consumer retail companies, because there is a very strong interest from both regional institutional investors and retail investors to participate in businesses that they are also the customers of,” said one Hong Kong-based banker. This is also positive in terms of achieving sustainable valuations, since “people make the best investment decisions when they are close to the story and understand the asset,” he added.

The investor interest is clearly a key reason why this trend has finally started to gather momentum after years of effort by the Hong Kong Exchanges and Clearing to market Hong Kong as a listing destination for non-Chinese companies (as a way to diversify revenues in case more Chinese companies decide to list in Shanghai in the future). And, according to bankers, global investors generally have confidence in the transparency and disclosure policies in Hong Kong, which makes them comfortable to invest their money here.

“The pool of capital within Asia that is buying IPOs has increased significantly in recent years,” said another banker. In addition to the mutual funds, pension funds, insurance companies and hedge funds, frequent IPO investors in the region now also include sovereign wealth funds, QDII funds in China and other domestic players allocating capital away from domestic assets.

The depth and liquidity of the Hong Kong market has been proven again and again through its ability to absorb large IPOs, like last year’s $20.5 billion offering by AIA and the $12 billion that Agricultural Bank of China raised from the H-share portion of its dual listing. And Hong Kong was again the largest IPO market in the world in 2010 with about $57 billion raised from new listings, according to PricewaterhouseCoopers. Helping to support this is the large number of retail investors in Hong Kong, who are highly active in IPOs – particularly those focusing on the consumer retail sector. The retail portion on such deals are often hundreds of times subscribed, triggering automatic clawbacks that can increase the size of the retail tranche from 10% at the outset to as much as 50%.

“The 50% IPO clawback creates a market dynamic that is fairly unique. It gives retail investors equal treatment [to institutional investors] and that is positive as they have demonstrated stickiness in the market over the past few years,” said the Hong Kong-based banker.

Clearly, though, the idea of listing outside their home market or one of the other traditional trading hubs like London or New York is no longer foreign to many issuers.

In Bank of New York Mellon’s annual investor relations survey, which was published in October last year, 22% of the 371 responding companies said they are considering a secondary listing in an emerging market outside their home country. And among those firms, 70% said a listing in China or Hong Kong would be of strategic interest to them.

In addition to a primary listing in Hong Kong, international companies that already have a listing elsewhere, now also have the possibility to list in Hong Kong through the use of Hong Kong depositary receipts (HDRs). So far, only Vale has taken advantage of this opportunity, although as noted earlier, the Brazilian company chose not to issue any new shares. As a result, the trading volumes in that stock have so far been very thin. On the first day 187,500 shares changed hands, but since then the daily volume has declined substantially and is now routinely below 20,000 shares per day, which translates into a turnover of less than $720,000.

However, Gregory Roath, who is head of Asia-Pacific depositary receipts at Bank of New York Mellon, still argues that the Vale listing was an important first step.

“The listing itself was good in that it validated the HDR structure. There were some questions in the market as to whether [HDRs] would be possible or feasible and the Vale listing put an end to that. Having a company such as Vale is also beneficial, I think, in connecting the BRIC markets, he said. “Certainly an HDR with an offer would have injected liquidity immediately…but Vale may be more interested in the strategic value of a listing here as opposed to the absolute trading volume.”

One other non-Asian company listed through an introduction last year, although the reason for that listing was a bit different. Indeed, UK insurance company Prudential, which is already listed in London and New York, listed in Hong Kong in mid-May while it was attempting to acquire AIA. The intention was for investors to be able to buy Hong Kong-listed shares to support the massive rights issue that was in the works to fund the deal and for investors in the region to gain exposure to AIA through the Prudential shares once the takeover was completed. However, the deal collapsed when Prudential’s existing shareholder decided that the price was too steep and the Prudential shares in Hong Kong became unnecessary and unwanted. They too see very little trading.

Hopefully these two cases will show issuers the importance of having sufficient liquidity in their stocks, and the best way to achieve that is to do a share offer in connection with the listing. According to bankers, most issuers they are talking to are aware of this and are likely to opt for that route – whether they choose to list via common shares or HDRs.

If they do, this could indeed prove to be an important development in the Hong Kong market.