Taking over another exchange is the last thing we need

PUBLISHED : Saturday, 30 October, 2010, 12:00am
UPDATED : Saturday, 30 October, 2010, 12:00am

With the Singapore Exchange announcing an US$8.3 billion merger with its Australian peer to create the world's fifth-largest bourse, all eyes are on the Hong Kong stock exchange.

Let's do something about it or we will lose out, many have said. How about marrying the mainland bourse? How about the London Stock Exchange?

To these noises, the listing of the Sihuan Pharmaceutical provides the best answer.

The Sichuan-based company owns the largest heart drug franchise in China. Two weeks ago it sold HK$5.5 billion worth of shares. The deal was so hot that it was subscribed 480 times.

On its first day of trading, Sihuan traded up to HK$5.85 from a HK$4.60 public offering price. That gives the company a price tag of HK$24.6 billion.

It is not just another story of successful listing. Only a year ago, the management removed Sihuan from the Singapore exchange where it was listed with a valuation of HK$2.33 billion. That was three years after a listing there.

Why is the same company worth nine times more within such short period of time?

Or why will the fund managers, who have access to every mature market in the world, pay nine times more for the same company when it's listed in Hong Kong?

It is not about fundamentals. Sihuan has seen its six-month profit double from 110 million yuan to 247 million yuan in the first half of this year. It has expanded into raw material production and export business. But it's nothing groundbreaking.

Some say liquidity. The ample supply of hot money did drive up the Hong Kong stock market significantly in the past month and Sihuan has had a good ride on it.

There is some truth in that. However, liquidity should be doing magic in both Hong Kong and Singapore. In fact, we have been lagging behind. Over the past 12 months, the Hang Seng Index has gained 12 per cent while the Straits Times Index had an 18 per cent gain.

Some say the right concept and timing has helped Sihuan. Beijing's recent announcement of a sharp rise in its medical bills has made pharmaceutical stocks hot plays once again. Some say it is all down to the presence of George Soros as a strategic investor in Sihuan (though his is only a US$40 million investment).

All these clearly help in getting Sihuan some newspaper headlines, but not the nine times valuation difference. Neither can it explain the price difference that we have seen in other stocks that have defected from Singapore to Hong Kong.

A good example is Want Want China. The rice-cracker maker was trading at 11 times price-to-earnings ratio when it filed for a delisting in mid-2007. Mind you, that's when the global stock market was bubbling and the company was entering its eleventh year of a Singapore listing.

In 2008, Want Want did a public offering in Hong Kong. It is now trading at 34.88 times price to earnings. That is more than three times what it used to get in Singapore.

Sure, the Singapore market has its own weakness to blame. It has given its China concept plays a bad start by sacrificing quality for quantity and scared money away.

But this cannot explain why French cosmetics producer L'Occitane International and other overseas issuers have been commanding a higher valuation in Hong Kong than its peers.

L'Occitane has gained 60 per cent since its summer listing. It now trades at 33.26 times price to earnings while the Paris-listed L'Oreal and New York-listed Avon Products are trading at 16.32 times and 24.46 times respectively

There is something unique about Hong Kong. There is the presence of mainland investors who are not only ready to accept higher price and risk but more diversified industries as well. While Sihuan is trading at 26.3 times price to earnings, mainland drug store stocks are trading at 40 to 60 times.

There are the local retailers who account for above 40 per cent of the trading - a ratio that is rarely seen anywhere else - and make stock gambling part of their daily routine.

Then there are numerous global institutional investors which have recently set up offices in Hong Kong in order to stay close to the mainland economy, its issuers and market intelligence.

The clustering of investors of different sizes and risk appetite mean more turnover, more analyst coverage, better valuation and more issuers.

As the mainland financial market matures and Beijing gradually relaxes its grip on its citizens' investment aboard, the valuation premium may disappear but not the cluster of listings we are enjoying.

In the meantime, it is only a matter of time before we enjoy yuan-denominated shares and the stronger investor presence flowing from that.

When you already have the best, why share it in return for nothing? Why waste our time and resources anchoring a merger or managing the battling egos that follow?

We don't need a HK$150 million cost saving, as in the case of the Singaporean takeover. Neither do we need a takeover to show the world and our citizens about our presence.

Let's spend our time looking inward rather than outward. It's about improving our technological expertise; making our market scripless; introducing competitive trading hours; venturing into commodities markets; meeting regulatory challenges that come with increase in foreign issuers ...

The list can go on and on. Taking over another stock exchange is the last thing we need.