Russian IPO fizzle shows limit of HK global plan
A little noticed event took place last week in the cosy world of investment banking, when Russian (and emerging markets) firm Renaissance Capital called it quits, closing its offices in both Hong Kong and Beijing after only two years on the ground in Asia.
Like its competitor VTB Capital, it hired big guns who had previously been with 'bulge bracket' banking powerhouses. The objective: to take advantage of initial public offerings by Russian companies that were expected to flood the market in Hong Kong, especially following the visit of then president Dmitry Medvedev in April last year.
A number of likely issuers from Russia have routinely made the headlines, although Rusal, the world's largest aluminium producer, remains the only company from that country to have listed in Hong Kong so far. Worse still, Russia still isn't included as one of the 'acceptable [sic] overseas jurisdictions' recognised by Hong Kong Exchanges and Clearing (HKEx) and listed on its website. (Rusal itself was technically incorporated in Jersey, a British tax haven).
This isn't all about Russia, though. Renaissance's exit also highlights the difficulties that international companies have when listing in Hong Kong. Many hopefuls were quick to jump onto the bandwagon - most particularly after the IPOs of L'Occitane and Prada on the exchange. But only a handful of those issuers have been able to tap investors in the city. Graff Diamonds was the latest candidate to throw in the towel, in late May.
Those that have listed in Hong Kong have experienced mixed fortunes, too. While Prada and L'Occitane are still trading comfortably above their IPO prices (23.6 per cent for Prada and 29.1 per cent for L'Occitane), others are deep under water. Rusal is down 59.3 per cent, Samsonite 12.7 per cent and Glencore 43.6 per cent.
A number of these companies generate low trading volumes relative to the shares available for purchase by the public (also known as the free float), pointing to a lack of interest by investors. Over the past month, according to Bloomberg, the equivalent of less than US$700,000 in Rusal shares changed hands every day, and the amounts for L'Occitane (US$2 million) and Glencore (US$1 million) were not much better. Even Samsonite's US$6.5 million pales in comparison with the US$15 million or so average daily trading volume seen for Haitong Securities.
As for share liquidity for those companies that have chosen to list in Hong Kong without issuing or selling shares (through a second or even third listing 'by way of introduction'), it is (as one would expect) pretty much non-existent.
So HKEx's gamble to diversify away from Chinese IPO issuers hasn't really paid off, even if including names such as Macau's MGM China enabled it to claim that 52 per cent of listings in Hong Kong in terms of IPO funds raised last year were by international companies.
According to HKEx, mainland enterprises still accounted for 58.7 per cent of the total value of shares listed (or market capitalisation) this year as of the end of May, as well as for almost 79 per cent of all shares traded - both metrics having actually increased since the end of last year. A significant part of the balance, I suspect, is likely to be made up by Hong Kong companies.
Listing in Hong Kong isn't for everyone. International issuers must have a substantial presence in China and a clear strategy for expansion in the region. With little or no growth in the West and already a large footprint in Asia, Prada ticked those boxes. Many others did not and have arguably been eyeing a listing in Hong Kong more to take advantage of seemingly higher valuations there, as well as an alternative to a depressed IPO market in Europe. That's hardly a compelling reason to float in Asia.
Investors haven't been fooled. Could it be the markets are rational after all?
Philippe Espinasse, a former investment banker, is the author of IPO: A Global Guide (HKU Press)