Japan's SBI Holdings first to sell HDRs in Hong Kong

SBI Holdings, a Japanese internet-based financial services group, is looking to raise up to HK$2.55 billion ($327 million) from the first ever sale of Hong Kong depositary receipts. The company, which kicked off its institutional roadshow on Monday and will open the retail offering today, is not the first company to list HDRs, but since Brazilian iron ore producer Vale listed its HDRs through an introduction and didn’t issue any new shares, this will be the first real test of whether investors are willing to buy these new instruments.

If successful, SBI will also be the only Japanese company to be listed in Hong Kong. However, with SBI having established a precedent for how to go about it, other Japanese issuers are expected to follow suit. This should please the Hong Kong stock exchange, which has worked hard in recent years to source listing candidates from a wide range of countries to reduce its dependence on Chinese companies.

It is impossible for Japanese companies to have a dual listing in Hong Kong because of restrictions related to where the shares are registered, and since SBI is already listed in Tokyo, it hasn’t previously been able to float here. But with the introduction of HDRs in mid-2009, this has all changed. SBI’s CEO Yoshitaka Kitao said the company was keen to list in Hong Kong and has been preparing for the HDR offering for more than a year. One key reason for his optimism, he said, is that the Japanese market has been one of the worst performers in the past decade. By comparison, Hong Kong is more efficient and has also yielded greater returns.

“I would rather be listed in Hong Kong than in Japan and I know a lot of Japanese companies that also want to list here,” he told the Hong Kong media yesterday in at a press briefing translated from Japanese.

However, Kitao stressed that the key reasons why the company is seeking a listing in Hong Kong is to increase its brand recognition in China and Asia, to reduce the cost of financing and to mitigate the intra-market risks.

The company has five core business areas in Japan, spanning the entire online financial sector, namely securities, banking, non-life insurance, life-insurance and settlement services. Its securities business is the leading online brokerage firm in Japan with a market share of just over 35% in terms of trading value – equal to the market share of its four closest competitors combined.

However, SBI also has a successful venture capital and funds investment business that is targeting growth companies both in Japan and in emerging markets, primarily China and Asia. As part of this, it has set up 14 overseas funds with local partners in high growth markets. According to the prospectus, SBI plans to take advantage of declining investment costs in emerging markets and invest Y25 billion ($305 million) in emerging markets through overseas and domestic funds in the next two years.

SBI has also been exploring opportunities with its partners to set up brokerage and other financial services in Asia and other markets. It currently owns a 40% stake in The Phnom Penh Commerical Bank in Cambodia, a 20% stake in Tien Phong Commercial Joint Stock Bank in Vietnam and a 9.99% stake in the Commercial Bank of Ceylon in Sri Lanka. In March last year it agreed to set up a joint venture in China with the China Securities Journal to operate a Japanese-language website that provides financial information about Chinese companies.

SBI is offering 17.5 million HDRs at a price of up to HK$145.52 per share. Because the IPO is being conducted against a live price, there is no lower price limit and the maximum price has been set deliberately high to give the bookrunners sufficient flexibility if the Japanese share price was to rise significantly before pricing. The company’s Tokyo-listed shares closed at Y10,160 yesterday and after taking into account the prevailing exchange rates and the fact that 10 HDRs is equal to one common share, the Tokyo share price translates into about HK$97 per share.

According to sources and based on the feedback from investors, the HDRs are expected to be priced at a discount of about 4% to 7% versus the common shares. Separate sources also noted that the institutional portion of the offering, which accounts for 90% of the deal, was fully covered yesterday, after three days of bookbuilding, and had attracted a lot of interest from Asia-based global funds.

This suggests that investors are willing to look beyond the current volatility in the Japan equity markets after the earthquake and that perhaps they see the sell-off as a buying opportunity. SBI’s share price dropped 27.4% in the two days immediately after the quake, but has recovered some of those losses since. At yesterday’s press conference Kitao said he didn’t believe the disaster would have a lasting impact on SBI’s business, but admitted that the problems at the Fukushima Daiichi nuclear plant suggest that it may take more than two years for the country to recover.

In the prospectus the company also noted that its financial results for the fiscal year to March 31, 2011, “may be adversely affected” due to the significant volatility of the economic and capital market conditions.” SBI is due to release its full-year earnings at the end of April. The company reported a net profit of Y686 million for the six months to September, compared with a profit of Y2.35 billion in the full year to March 2010.

The new shares to be issued through HDRs in Hong Kong will account for 8% of the enlarged share capital. The deal also comes with a 14.3% overallotment option that could increase the total number of HDRs on offer to 20 million. The retail portion may be increased to as much as 50% from 10% initially in case of strong demand.

The retail and institutional offerings are both set to close on April 6 and the final price is expected to be determined shortly thereafter. The trading debut is scheduled for April 14.

Daiwa Capital Markets is the sole sponsor and global coordinator for the offering and a joint bookrunner together with CCB International.