More Russian companies expected to hit Hong Kong

Rusal's listing in Hong Kong in January may have had its share of controversy at the time, but participants at the AsianInvestor/FinanceAsia Russia Capital Raising and Investment Summit in Hong Kong last week agreed that it changed the way Russian companies view their overseas listing alternatives.

Hong Kong is now definitely one of the exchanges they will consider, alongside London and New York, and one of the key edges that this market has over its counterparts in the West, according to the panel participants, is liquidity. Indeed, in 2009 more money was raised through initial public offerings in Hong Kong than on any other stock exchange in the world. The $31 billion pocketed by market newcomers was more than double the IPO volume on the New York Stock Exchange.

"When all the global markets were trying to recover from the crisis, Hong Kong still demonstrated a capability to execute successful IPOs. Obviously all the Russian companies have seen this and are now thinking, why not Hong Kong?" said Elena Khisamova, head of equity capital markets at Russian investment bank VTB Capital. This is coinciding with the same companies slowly realising that the world has changed after the crisis and that growth is now actually in Asia. "So maybe from an underlying business perspective too, it makes sense to be listed here where your major customers or suppliers are," Khisamova said.

"People say that the Hong Kong market only offers Chinese investors, or Asian investors, but actually, pretty much all of the US and European global funds have offices in Hong Kong. And by doing a HK listing you are able to capture pretty much all of the global funds," added John Lee, head of Hong Kong investment banking at Bank of America Merrill Lynch. He noted that in response to the liquidity in the Hong Kong market over the past six to nine months, more and more international funds are looking to set up businesses here, which should ensure that this trend continues.

But Hong Kong's open market also has other advantages that make it an attractive listing alternative for companies from other jurisdictions, noted Lawrence Fok, chief marketing officer at Hong Kong Exchanges and Clearing, which operates the Hong Kong stock exchange. These include low tax, a good regulatory system, a lot of professional talent, no capital controls and a currency that is freely exchangeable into most other currencies, while at the same time being pegged to the US dollar -- in other words there is no exchange risk at all in terms of the US dollar, which takes away a lot of uncertainty.

Another thing that characterises the Hong Kong market, Fok said, is the huge number of retail investors who provide a lot of liquidity. According to stock exchange estimates, retail investors account for more than 30% of the trading volume on the Hong Kong exchange, which is quite high compared with a lot of the developed markets in the West. In London, for instance, only about 5% of the daily turnover comes from non-professionals.

"Also, when you think about where to list a company you need to think about the potential when mainland China opens up its currency as there are over 120 million investor accounts in China," Fok said. "I don't know when this is going to happen, but everyone knows that China is very keen to open up its currency so, as time goes by, definitely you will be seeing more investments from the north."

At the same time, investors in Russian stocks seem to be turning away from London, which for many years was the most active market for trading Russian assets, accounting for about 25%-30% of daily volume. But according to Andrei Tsivarev, head of international relations at Micex, the operator of the Moscow stock exchange, that changed last year and now London accounts for only about 15%-20% of the total trading of Russian companies. The rest of the trading has moved back to Russia, he said.

Alexander Lopatnikov, managing director of American Appraisal and one of the leaders of its global extractive industries team, noted that Hong Kong is also in the process of drafting a new regulation with regard to the listing eligibility of extractive industries companies, i.e. resources companies. This, he said, is quite important for Russia since a significant portion of the economy is represented by this sector and several of these companies are believed to be interested in seeking a listing in Hong Kong.

Otherwise, Hong Kong is doing a "great job" in terms of providing information and requirements for disclosure and it also uses international financial reporting standards, which is the lingua franca of today for the investment community.

"So, Hong Kong has all the capacity and may become a major listing place, especially as it is being positioned as a gateway to China and China is right now consuming about 50% of the commodities in the world," Lopatnikov said.

To begin with, Russian companies coming to Hong Kong are expected to be primarily from the resources sectors, as they are seen to have a "natural fit" because of their growing trade flows with China, or from industries directly involved in this trade, such as infrastructure providers. Indeed, this trend isn't expected to be limited to Russian companies, but to include companies from other resources-rich nations as well, such as Kazakhstan, Mongolia, Canada and Australia. As the largest aluminium producer in the world with an increasing share of its sales coming from China, Rusal was a good example.

"Resources is a very important industry in Russia and China is a net consumer of resources. For these types of companies, there is a lot of connectivity with China and a natural story that you can articulate to investors," said Lee at BoA Merrill. "Also, Hong Kong is a base for a number of resource-focused funds in the region and for that reason you see a number of international resources companies listing here." BoA Merrill was one of the eight bookrunners on Rusal's $2.24 billion IPO.

"Russia is a huge commodity producer and has a lot of reserves of all the key resources that China is short of and will be consuming for a long time. So yes, this is one of the reasons why Russian companies from this segment will be very keen to come here," agreed Khisamova. "But apart from that I think the Russian economy also can provide quite a quality story by itself."

"Russia is one of the biggest economies in the world and accounts for 7%-8% of the MSCI emerging markets index. Portfolio managers simply cannot ignore that," she continued. "Many fund managers are overweight Russia right now because they want to play the commodities story, which is now back on its cycle. But Russia is also a significant consumer market. We have quite established, very good, quality retail players, and we have players in the consumer space and in financial services, which might be of interest to Asian investors. Probably not at this stage, but as soon as the market develops and as more companies come here the interest will diversify from natural resources to other areas," Khisamova said.

The panellists were reluctant to make projections on how many Russian companies may follow Rusal to the Hong Kong bourse in the coming years, but BoA Merrill's Lee said based on the dialogue his bank has had so far, Hong Kong will be seriously considered as a listing venue by Russian companies. "Hong Kong can be as major a market as London in the past, and I would not be surprised if in four or five years' time we see a size that is comparable to what we have seen in the past in London."

Thirty Russian companies have listed on the London Stock Exchange in the past five years, with a peak of 13 companies in 2007.

Khisamova at VTB, which was also involved as a bookrunners im the Rusal IPO, said she will not be surprised to see "three, four or maybe five" Russian IPOs come to Hong Kong in the next two to three years. "Probably you will consider this a conservative number, but we know how much effort the market required in terms of the education of investors and the market about Russia and the Russian story, so it will take a couple of years at least to develop this market properly," she said.