Why HK’s IPO woes won’t be SGX’s gain

The cracks are starting to show in Hong Kong’s once buoyant market for initial public offerings, but that isn’t necessarily good news for rival Singapore.

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Guanyu said…
Why HK’s IPO woes won’t be SGX’s gain

By WONG WEI KONG
27 June 2011

The cracks are starting to show in Hong Kong’s once buoyant market for initial public offerings, but that isn’t necessarily good news for rival Singapore.

In fact, for the Singapore Exchange (SGX), the battle to win IPOs may even be tougher.

Two recent major benchmark issues in Hong Kong have served to highlight the vulnerabilities currently underlying the IPO market. Last week, Italian fashion house Prada saw its shares close a slim 0.3 per cent higher at HK$39.60 on its debut on Friday. And this came only because the maker of luxury bags and Miu Miu dresses priced its US$2.14 billion IPO at HK$39.50 a share, the bottom of a revised indicative range. Even so, it received tepid demand for the shares it offered to the public.

But at least Prada stayed above water on debut. Earlier this month, Samsonite faltered on its Hong Kong debut. The US luggage maker slumped and ended its first trading day at HK$13.38, down 7.7 per cent from its IPO price of HK$14.50. Samsonite also priced its offering at the bottom of a price range of HK$14.50-15.50 per share.

In truth, Prada was only the second to post first-day gains among the billion dollar-plus IPOs in Hong Kong this year (after MGM China, which rose 1.8 per cent). Little wonder then that caution has now gripped the market. Last Friday, market sources reported that China Everbright Bank Co Ltd had delayed meetings with investors to promote its planned Hong Kong listing. The mid-sized lender - which had planned to start roadshows with investors this week and price the deal on July 8 - now aims to have the share sale wrapped up by the end of summer instead.

The weakness in Hong Kong’s IPO market is the outcome of several factors, such as concerns over overhangs in the Hong Kong and Chinese markets, the developing fiscal crisis in Europe, worries about the US economic recovery as well as stock-specific issues.

On the surface, the rattled Hong Kong IPO market should be welcome news for SGX, given that the two markets are seen as keen rivals for international listings. Especially so, when SGX has been trailing in the IPO stakes in recent years.

Unfortunately, this is not the case. Some of the major factors crippling the Hong Kong market, such as US and European concerns, affect SGX too. And at least Hong Kong still has mega IPOs making weak debuts. In Singapore, since the record listing by Hutchison Port Holdings Trust in March, the IPO market has gone mostly quiet. While Prada debuted in Hong Kong last week, the only IPO activity on SGX was a small waste management company, 800 Super Holdings, announcing plans to list on SGX’s Catalist board for small companies.

And while SGX is affected by some of the concerns facing its rival, it does not enjoy the long-term draws of Hong Kong - and the Chinese market.

The market weaknesses presently in play are unlikely to turn away the big names eyeing a Hong Kong listing. The move by consumer-focused companies such as Prada to list in Hong Kong is part of a trend to raise brand awareness in China, the world’s fastest growing luxury market. It’s a point illustrated by reports that English Premier League football champions Manchester United are also mulling a Hong Kong listing. Out of nearly 300 million fans around the world, more than 190 million fans are in Asia with many in China, and the club said it expects continued growth in Asia to drive sales of merchandise and revenue from commercial agreements.
Guanyu said…
That long-term lure of the Chinese market - with Hong Kong as the gateway - will likely persist through the present weakness. The lesson from the weak IPO debuts in Hong Kong is that of valuations: while Asian consumers may be prepared to fork out lots of money for the latest designer bags, the investing community is a lot more conservative. So a Prada IPO cannot be priced like a Prada bag and still draw a queue of buyers. For the global names and their investment bankers, that’s a sobering lesson but - and this is the critical point - the Chinese promise remains.

And it’s something SGX cannot offer. While global names may be prepared to look beyond the limitations of the Hong Kong market because of the draw of China, they see SGX for what it is: a small market lacking breadth and depth. The failed merger with the Australian Stock Exchange has laid this even barer, and while SGX will continue to attract the occasional big IPO or two, and specialised vehicles like trusts and Reits, it will be severely constrained in capitalising on Hong Kong’s present weakness.

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