Summer 2012

ASIAN EXCHANGES: A million millionaires

MakeoverChina is poised to become the world’s largest market for luxury goods, with more and more brands seeking a listing in Hong Kong. Stefanie Eschenbacher finds going public in the region is no longer just about raising funds.

Graff Diamonds is the latest luxury brand to pursue a listing in Hong Kong, surrounded by Asia’s rich.

The London-based jeweller followed the likes of French toiletries maker L’Occitane International and Italian fashion house Prada, which both went public in Hong Kong last year.

A listing here is no longer about raising funds, but increasingly about raising the brand profile in a region that drives much of the world’s luxury consumption.

With China home to an emerging middle class, a million millionaires and 600 billionaires, it is poised to become the world’s largest market for luxury brands this year, helped by extremely favourable attitudes towards brands, increasing levels of wealth and confidence in future economic markets.

Top five
On average, Chinese consumers now recognise 57 luxury brands, a figure that rose steadily over successive surveys, according to a recent report by KPMG, entitled Luxury experiences in China.

Chinese consumers distinguish between countries of origin, favouring European brands at the expense of other regions.

They also associate certain countries with certain products: Switzerland for watches; France for fashion, accessories and cosmetics; and Italy for footwear.

Keith Pogson, managing partner, Asia Pacific financial services, at Ernst & Young, says there is a trend for luxury brands to move towards Asia, where much of the future growth lies. “Hong Kong used to be China’s gateway to the world,” he says. “Today, Hong Kong is the world’s gateway to China.”

Despite a tough start to the year, Ernst & Young again ranked Hong Kong, Shenzhen and Shanghai stock exchanges among the top five global markets by capital raised.

Out of the top 20 global initial public offerings over the last quarter, eight happened on Asian stock exchanges. Activity in those markets accounted for 47% of global funds raised through initial public offerings, with 84 deals raising a total of $6.7 billion.

Compared with the first quarter of last year, Asia saw a 74% drop in capital raised.

In the long term, however, the greater China region is likely to remain attractive to companies from developed markets. This is not only the case for luxury goods but for consumer goods in general, as well as industrials, materials and technology.

“For many global companies, Asia currently contributes a significant part of their sales,” says Lee Chiow Wei, chief investment officer at Tokio Marine Asset Management International. “More importantly, it is still growing and expected to grow further in the future.”

Wilfred Sit, chief investment officer at Baring Asset Management Asia, agrees. “The future growth of these companies comes from China or Asia generally,” he says. “Investors are willing to pay a higher price for these stocks.”

More global companies are to list in Asia as they seek higher valuations and a strategy to promote their brand names, says Wei, adding that many would like to list in China but are struggling with the requirements set by the local regulator.

While valuations for an initial public offering in Hong Kong tend to be lower than in the domestic market, requirements are more transparent and the process is a lot faster.

“These advantages would entice many companies, especially privately owned Chinese companies, to seek a Hong Kong listing instead of listing in the domestic market,” says Wei.

Chinese companies that wish to pursue a listing overseas need approval from the China Securities Regulatory Commission. They also need approval from the government to send proceeds back to China, unless these are used for overseas expansion.

“We observe that there are some changes to the general trends (…) because the listing process in Hong Kong is becoming more stringent due to the tight rules implemented by the China Securities Regulatory Commission,” Wei says.

“We do not expect the trend of listing overseas to reverse sharply, but we believe this process might bring more Chinese companies to be listed in the domestic market.”

Pogson says the level of corporate goverance required for a listing in Hong Kong is in line with that of London. “The challenge is, as it is elsewhere in the world, evaluating the underlying business,” he adds.

Wei says while companies that are audited by one of the big four auditing firms are generally considered as trustworthy, interviewing the corporate senior management remains an important part of the research process to verify the information and to evaluate management background.

“There are a lot of things that are difficult to verify for us,” concedes Sit, adding that there are many ways for companies to fudge their figures prior to going public. Even an audit from a recongised accounting firm can be deceiving.

Highlighting the importance for fundamental analysis, Sit says his team pays attention to growth, liquidity, currency, management and valuation.

Buying into an initial public offering does not necessarily make a compelling investment case, but it appears there will be more initial public offerings to choose from. 

Despite difficult current market conditions, Ernst & Young highlights in its latest edition the Global IPO Update that there are a number of positive signs of fundraising activity worldwide. Cross-border activity has already increased this year, the report says, and  companies are no longer listing in their home country by default.

©2012 funds global

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