Are we better prepared for mainland investor invasion?

This is a mainland-based manufacturer whose share price has more than tripled in the past 12 months. Its market capital exceeds HK$15 billion. International mutual funds have replaced men in the street on its investors' list. They own half of the free float of this privately controlled red chip. You will imagine its investor relations director has his legs crossed on the table, wondering which new car to buy with the windfall from his share options. Wrong. He told this columnist the company was hiring a public relations firm to organise its first road show in the mainland. He is to take the company's newly announced 2006 results to mainland investors in Beijing, Shanghai and Shenzhen next month. 'It is time to let mainland investors know who we are and to educate ourselves on their game rules,' said the director, who prefers anonymity. This discussion came five days after Beijing revised its qualified domestic institutional investor (QDII) scheme, allowing banks to invest clients' money in Hong Kong equities, other than bonds and currency. Not that the investor relations director was excited by the bull run among Hong Kong-listed mainland companies last week. Given yuan appreciation and the double-digit returns in the domestic stock market, no one expects mainlanders to flock into the new QDIIs. In fact, mainland bankers are still wondering how to make the poorly subscribed scheme a success this time. Some are conducting research to find out where customer preferences lie. Besides, they are only talking about a US$7 billion quota, which is a drop in the ocean. No wonder strategists of some international securities houses have dismissed the new policy as 'a very small step'. This view, however, misses one important thing - this small step is the beginning of a new policy - mainlanders being allowed to invest in overseas stock markets. Given Beijing's determination to drain excess liquidity, it is only a matter of time before more money will be allowed to go overseas. Also, don't forget the signalling effect the new policy will have on the smart money from China. You may recall what happened in 1993. That year, Beijing gave Tsingtao Brewery the approval to list as the first mainland enterprise overseas, raising a humble US$60 million. Back then, who would have imagined the US$20 billion listing of Industrial and Commercial Bank of China? Who would have imagined mainland firms becoming the core of Hong Kong's equity market and the profit engine of many international investment banks? The manufacturer mentioned above wants to be well-prepared for the arrival of a new era. 'The new QDII scheme, if anything, will confirm my belief that institutional investors in the north will be of growing importance here,' the director said. He is not hoping that the new money will bring the company's share price to a new high. Instead, 'stability' is what he is aiming for. Stability? From mainlanders who have pushed their own market to a price-earnings ratio of 40 times? Yes - this is no typo. He believes holdings by mainland investors will bring long-term stability to the share price if the company manages them well. Mainlanders have a different understanding of the political and economic systems of their own country. 'A corporate move seen as a risk by foreign investors may be considered in the mainlanders' eyes as a growth potential,' he explained. There is also the difference in valuation a corporate can get from foreign and mainland investors. This will continue in the near future given Beijing's concern about financial stability and, therefore, controls on capital flows. The director does realise mainland investors can bring volatility if they dominate the shareholders' list. The challenge is in finding the right investors, knowing their ground rules and striking a good mix with foreign investors. 'The learning curve is steep, and we'd better start early,' he said. Well, you don't have to agree with everything he says. Nor is his vision applicable to every company and business. The question is: He is preparing, how about you? This is a question not only for company management but also for our market participants and regulators. In the past decade, the arrival of mainland corporations - first the state-owned enterprises, then the privately controlled ones - has exposed the Hong Kong financial industry to a series of cultural shocks. After many corporate scandals and painful lessons, we have gradually put up a regulatory and market mechanism to accommodate them. Now, here comes the mainland investors and with them the fund managers as well as the brokers. These people have been operating in an environment largely different from the rest of the world. Coming with them are opportunities and challenges. Have we got smarter? Are we better prepared this time?