When Italian fashion company Prada, luggage maker Samsonite and commodities trader Glencore raised money from Hong Kong investors in 2011, they were following what is becoming a well-trodden path for international companies. Past deals include the HK$138.3bn ($17.9bn) listing of insurance company AIA in 2010, perhaps the highest profile. Some reckon it was also the most successful.
By choosing to list in Hong Kong, these companies proved that even in the choppiest market conditions, well regarded global brands can still exploit their growth potential in China by turning to an IPO market right on its doorstep. Bankers hope that the stream of firms choosing Hong Kong could turn into a torrent, in spite of investors being cautious after taking a battering from volatile markets in 2011. International companies, they say, could be just the right names to convince the buyside to commit cash.
Being known helps. Global consumer brands have a strong following in Hong Kong — its shopping malls teem with logo-chasing crowds. Prada’s sales in Asia are catching up with its home European market quickly, with an annual growth rate of just over 50% since 2008. By contrast, many Chinese issuers in Hong Kong are entirely unfamiliar to investors until they have done their research. International companies can expect much of the local investor base to have a fairly clear idea of the business model before a deal even gets underway.
The difficulty of listing elsewhere has also strengthened Hong Kong’s hand. "The success of consumer names last year despite the volatility has given some corporates reassurance that it is still worth considering Hong Kong for listing, especially as Europe’s equity markets may continue to prove challenging for IPOs," says John Lydon, co-head of ECM for Asia at Deutsche Bank. "The international theme will continue this year, but investors will be more discerning."
The biggest success of international companies in Hong Kong may be the extent to which they have encouraged their rivals to follow suit. Graff Diamonds, Ducati and Italian fashion house Ferragamo have all been linked with deals, although the latter two issuers have not yet mandated banks.
Trend-setting Prada
Prada’s HK$16.7bn ($2.14bn) listing in 2011 was one of the most closely watched IPOs of the year across the world. The company used a strong story — the hope of future growth in China — to raise money at a premium to comparables including Burberry, L’Occitane and LVMH Moet Hennessy Louis Vuitton.
Hong Kong made perfect sense for the Italian fashion company, given its Asia sales growth — half of which is accounted for by Greater China.
The deal’s execution was not without its challenges, however, most prominently a 12.5% withholding tax on dividends for investors outside Italy. Hong Kong investors will also be subject to a 12.5% capital gains tax if they sell a non-substantial stake in Prada. The existence of these taxes shocked rival bankers and turned off some investors, especially retail accounts, according to several syndicate bankers.
But Hong Kong and Italian officials are in discussions about setting up a tax agreement to make it easier for Italian companies to list in Hong Kong. This could pave the way for issuers like Ferragamo, and help the exchange attract even more business over the next few years.
Hong Kong is also expected increasingly to provide an attractive listing venue for international companies in 2012, and not just defensive consumer companies, says Chris Marshall, head of international listings at RBS. European industrial companies that are cutting back production in Europe but want to raise equity and expand their influence in Asia are also starting to look at Hong Kong as an attractive alternative to listing in Europe.
"The great opportunity in Asia is that it is still a fairly clean institutional market because you have a robust fair debate around valuation," says Marshall. "People keep an eye on who regionally is supporting a deal, such as a local tycoon, so this helps the foreign company to position itself in Asia."
But local bankers are cautious about encouraging too many similar companies to take the market at the same time. The rush of financial institutions to list in Hong Kong at the end of last year — many of them from China — proved how quickly investors can get tired of supply from one sector. That is one reason why they are so keen to bring international companies to the market.
"Investor fatigue is a big issue," says Alexis Adamcyzk, co-head of equity capital markets, Asia Pacific, at HSBC. "We need refreshing stories, not just another ‘me too’. That is why it’s interesting to see more global brands listing in Asia. They are unique."