Is Hong Kong and China's ECM dominance here to stay?

Hong Kong climbed to the top of the global league table for initial public offerings (IPOs) in 2009 and 2010, raising $57.4bn last year. The Hong Kong Stock Exchange (HKEx) enjoys the clear advantage of the vast funding requirements of mainland Chinese companies, which are increasingly keen to tap the markets for growth capital. On the investor demand side, the region's pension funds, insurance companies, sovereign wealth funds and asset managers are rapidly accumulating assets, with many of these seeking local opportunities or, in some cases, required to hold domestic assets.

"As of year end 2010, Asian institutional investors held $1600bn in assets, which is roughly a 7% share of the global asset pool managed by institutions," says Arun Bansal, managing director and head of financial strategy for Asia-Pacific at Citi in Hong Kong. "This share represents a four-fold increase over levels seen only five years ago and these investors show a certain comfort with and preference for investing within their home region."

It is not just Chinese or Asian companies that are keen to list in Hong Kong. The region's growing pool of capital has led the way for the increased globalisation of the HKEx. Russian aluminium group United Company Rusal and French cosmetics company L'Occitane both listed in 2010 and have been followed this year by other Western brands such as Prada and Samsonite.

For international companies, a Hong Kong listing is a clear signal that Asia is a key market for their brand.

"When an international company lists in Hong Kong it signals to investors that it intends to be heavily involved in Asia and intends to grow its operations in the region," says Mr Bansal. "Since growth prospects in Asia are generally better than elsewhere in the world, companies may achieve a better valuation by showing that they have a clear game plan for Asia."

Growth markets

John Crompton, global head of equity capital markets at HSBC, says Asian investors are naturally focused on capitalising on the very strong growth opportunities in their own region, which has made Hong Kong an attractive primary market for global companies with a lot of their growth in China and across Asia.

In 2010, HSBC was an underwriter on the IPO for L'Occitane. The success of this deal paved the way for IPOs seen this year for both luggage manufacturer Samsonite and Italian luxury goods company Prada. Local consumer appetite for such goods is key. "Prada already has 30% to 40% of its sales in Asia and its highest growth is in the region. Having a good Asia-centred story is key for this type of IPO," says Mr Crompton.

Another recent deal tapping into the Asian consumer demand story is Sun Art Retail Group, which listed in July and raised HK$8.2bn ($1.05bn), with HSBC, Citi and UBS as global coordinators.

Shares in Sun Art – a joint venture between French retail group Auchan and the Ruentex Group of Taiwan, which operates almost 200 hypermarkets across China – priced towards the top of the indicated range. The retail tranche was 42 times oversubscribed, triggering a clawback from the institutional tranche, which was itself 15 times oversubscribed.

Strong pipeline

The IPO pipeline looks good, say bankers. Hong Kong-based public relations company Wonderful Sky is about to start pre-marketing and more listings are expected from the Macau casino sector after the $1.5bn equivalent flotation in early June of MGM China Holdings.

"Macau has been the largest gaming market in the world since it overtook Las Vegas in 2006," says Danie Schutte, analyst at the CLSA brokerage in Hong Kong. "We see more room for growth and little concern for saturation in the market. The Asian wealth effect will continue to fuel sector growth."

The HKEx is also developing renminbi-denominated products, taking advantage of the pool of renminbi funds that has built up in Hong Kong, as well as international demand for renminbi-denominated assets. The idea is that renminbi will be the principal fundraising currency, with a minimum level of subscription in renminbi, but accompanied by Hong Kong dollar subscription options.

Under dual-tranche, dual-counter renminbi IPOs, the renminbi and Hong Kong dollar shares will be traded, cleared and settled separately. One renminbi-only denominated real estate investment trust, Hui Xian, which is linked to the Cheung Kong group, has already completed an IPO this year.

Regional competition

While long-term trends point to Hong Kong strengthening its position at the top of the global IPO league table, it is facing increasing competition for international listings, not least from the Shanghai Stock Exchange in mainland China, which will add to established regional competitors such as the Singapore Stock Exchange.

"One interesting additional dynamic is the planned Shanghai International Board [for foreign companies], and there is currently a lot of speculation as to which companies will be initially allowed to list there," says Stephen Revell, global co-head of capital markets at law firm Freshfields.

"There will be rigid controls about who can list and it remains unclear how fast the Chinese authorities will let the international board grow. But looking to the future, if a company such as Prada listed in Hong Kong mainly because of its China growth story, it might make sense for some international companies to go a step further and choose the Shanghai International Board for their IPO."

IPO travails

It has not all been plain sailing, however. The Sun Art IPO may have been a rip-roaring success, but deals on the HKEx have not been immune from the travails that have affected listings elsewhere in the world. A number of companies postponed their offerings after a series of IPOs performed poorly immediately after listing or priced at the low end.

Samsonite shares, for example, fell by 11% on their first day of trading in June, despite being priced at the bottom end of revised price guidance. Many feared that the dismal debut by the US luggage maker could hurt plans by other Western brands to tap the Hong Kong market, particularly as its lacklustre performance came just as Prada lowered the top amount it was seeking to raise in Hong Kong.

Prada was forced to price lower; it had originally set an indicative price range of HK$36.50 to HK$48 per share, before narrowing it to between HK$39.50 and HK$42.25. Nonetheless, Prada managed to slim gains in its $2.14bn IPO debut in Hong Kong, closing 0.3% higher than its opening price.

Some bankers suggested that Prada's experience offered a strong lesson to other brands considering a listing: that they should not price issues too aggressively. Chinese and other Asian consumers may be willing to pay a premium for such luxury brands, but investors want to see reasonable valuation and pricing.

London and New York

So what does Hong Kong's growing prowess mean for the world's two leading markets, London and New York? London has been going through a quiet period; it has raised only $14bn so far this year – versus Hong Kong's $18bn – and this figure was dominated by the $10bn Glencore IPO, which was itself a joint listing with Hong Kong (shares fell on both exchanges).

However, bankers note that London remains the natural destination for many international companies, not least western and eastern European companies whose domestic exchanges do not attract sufficient attention from global investors.

Market participants also point to the long pipeline of IPOs waiting for the right market conditions to be executed. "London still has a lot of kudos, including with owners of companies from eastern Europe and the Middle East," says Iain Hunter, co-head of equity capital markets at law firm Clifford Chance. "There is no shortage of companies looking at London listings and IPOs."

He also argues that London continues to be the natural jurisdiction for particular industry sectors. "Companies in sectors such as energy, mining and financial services have often favoured London, and that is likely to continue in the future,“ he says.

Early days

Many argue that it is too early to be speaking about London's or New York's decline. For one thing, New York sits atop of what remains the largest capital market and the biggest economy in the world. Moreover, NYSE Euronext has retaken the IPO crown, leading the global league table for listings in the first half of this year, with $25.4bn of equity capital raised.

Commentators reason that if the proposed merger between NYSE Euronext and Deutsche Börse gets approval, this will give the combined group further advantages in attracting both domestic and international listings.

However, there is no doubt that London and New York face ever stronger competition. Mr Hunter says: “The market is currently in an uncomfortable phase and we need a period of macroeconomic stability to see more deals complete. At the moment investors are being extremely selective and highly sensitive on pricing, while many company owners are still in the process of adjusting their valuation expectations."

"The core advantage of London is the depth of the market, with its very large domestic institutional investor base plus a very broad international institutional investor base," says Mr Revell at Freshfields.

Nonetheless, he expects Hong Kong to top the global volume table for IPOs again this year and has recently relocated to Hong Kong because of the busy pipeline of deals that Freshfields is working on, involving consumer-related companies, financial institutions and sectors such as renewable energy, where Freshfields advised the underwriters on the Huaneng Renewables IPO in June.