Hong Kong IPOs and their Implications

July 6, 2011

Italian fashion house Prada SpA lists its shares in Hong Kong on 24 June 2011.

Prada, the first Italian company to do its Initial Public Offer in Hong Kong, is joining the growing gang of foreign consumer brands listing in Hong Kong rather than their home markets. L’Occitane International SA, a French cosmetic and skincare products market leader, was the first French company to join Hong Kong with a $787 million Initial Public Offering in 2010. Both firms have been rapidly opening stores, most notably in Asia, where millions of newly wealthy consumers are buying luxury goods.  It is estimated that China will account for 20% of the global luxury market by 2015.

So why list in Hong Kong but not other Asian cities?

In many areas, such as IPOs and debt markets, Singapore has been competing against Hong Kong to become Asia’s major financial hub. However, it lacks two key advantages of Hong Kong.  First, Singapore is not part of China. Second, it lacks the transparent and well-regulated market of Hong Kong, further reducing its financial and economic competitiveness, particularly in the eyes of international investors. What about Shanghai or other cities in mainland China? Shanghai has certainly made enormous progress to establish itself as the largest financial centre in mainland China, but China doesn’t allow foreign companies to list in its stock market and there is no official timeline for when this will change.

Since Hong Kong is the only Chinese exchange fully open to foreign investors, the market has benefited as global investors shift more funds toward China and other emerging markets in their quest for better returns. Moreover, Hong Kong is able to offer a traditional free market culture for companies, while simultaneously having a well established legal system based on English common law that provides a strong and attractive foundation for companies to raise funds.  All of this contributes to investor confidence and interest in the market.

Prada was priced at a price/earnings ratio of 22.8 based on 2011 forecasted earnings, indicating how valuations in Hong Kong tend by be higher than in Europe – or at least in the luxury goods space.

So what does this mean for asset managers?

The success of Prada’s IPO and the trend it represents is one of many proof points that wealth continues to develop in Asia, particularly in mainland China.  Goldman Sachs has repeatedly argued that Hong Kong has the most to gain from capital relocations away from developed to emerging markets, as well as from China’s growth in general.  Financial services companies in Hong Kong are best positioned to take advantage of further liberalization of the Yuan.  For most of us, these points are not controversial.

However, the IPO trends in Hong Kong may be indicative of more disconcerting issues in Europe.  With constant concern about debt levels in EU countries, is the IPO trend in Hong Kong an early indicator that Asian markets, and Hong Kong in particular, will start seeing an inflow of European money in addition to inflows from Asia?  Is the trend commentary on deep, fundamental concerns in Europe?

With a deep presence in Asia, PORTIA observes first-hand the dynamic nature of Asia’s financial markets.  Over the past two years we’ve doubled our investment in staff in the region, in Hong Kong and other high-growth markets.  We see asset managers performing well, driven by many different dynamics including those mentioned above.  While we cannot foresee the future of Europe’s markets, we’re confident that the barriers for investing in Asia are being torn down rapidly.  Prada’s Hong Kong IPO is evidence that financial markets have globalized.  We believe this presents great opportunities for asset managers, irrespective of their location.

PORTIA is a truly global middle-to-back office operations platform.  Our solutions cover an exhaustive range of asset classes, in multiple currencies.  Our solutions integrate with firms’ existing IT infrastructures and can be implemented easily, meeting the demands of regional asset managers.  Yet our solutions are also scalable – enabling a regional asset manager to grow globally without having to make additional investments in technology.

What do you make of the IPO trends in Hong Kong and in Asia?

-Galix Leung, Sales Consultant, PORTIA – Hong Kong

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