March 13, 2014 12:00 am JST

Hong Kong stock investors give foreign issuers cold shoulder

Philippe Espinasse

Fast Retailing, the Japanese owner of fashion brands Uniqlo, Theory, Comptoir des Cotonniers and Princesse Tam Tam, listed depositary receipts in Hong Kong on March 5. This was the latest in a string of initial public offerings in the city by international retailers and a handful of smaller companies from Japan.

     But Japanese issuers should be in no rush to float in Hong Kong, which remains, first and foremost, a platform for Chinese issuers.

Not quite red carpet

In recent years, in a bid to reduce its reliance on companies from the Chinese mainland, the Hong Kong Stock Exchange has moved to allow companies incorporated in 21 additional overseas jurisdictions to apply for listing, up from just China, Bermuda and the Cayman Islands. Those who have taken advantage include cosmetics chain L'Occitane -- which has French origins, but is incorporated in Luxembourg -- and Rusal, a Russian aluminum producer incorporated in Jersey. The listings of luggage maker Samsonite and of Prada, a fashion label, in June 2011, led to a flurry of "branded" candidates for listing in the territory, very few of which ultimately started trading on the exchange.

     To date, 33 international companies have chosen to list in Hong Kong. Some of these, however, are Chinese companies registered in the British Virgin Islands or other offshore jurisdictions. Two international issuers ­-- Sino Gold Mining from Australia and Germany's Schramm Holding -- have since delisted. Others, such as Canada's Sunshine Oilsands, have subsequently sought an additional listing closer to home.

     Japan has produced three listings. Broker SBI Holdings was the first, in April 2011, issuing depositary receipts in Hong Kong linked to its primary listing on the Tokyo Stock Exchange. Pachinko operator Dynam Japan followed in August 2012. The possible listing in Hong Kong of Baroque Japan, owner of the Moussy brand, widely rumored in the aftermath of Prada's IPO, did not materialize, although Belle International, a company already listed in Hong Kong, bought almost a third of Baroque last year.    

     SBI and Dynam have achieved mixed results. On March 4, SBI's board of directors announced the company would withdraw its Hong Kong listing in June due to very low trading volumes on the Hong Kong bourse. Trading at one point reached about 9.1% of issued shares, but more recently the figure has fallen to about 0.05%.

     Dynam has fared better. Its share price has doubled since its flotation and it now posts healthy trading volumes, too. But its share price languished amid low trading until last summer, when the company subscribed as a $35 million cornerstone investor in the IPO of Macau Legend Development, a casino hotel owner whose stock has since tripled in value. Dynam shares have also benefited as prospects for the legalization of casino gambling in Japan have improved.

Tough home crowd

Fast Retailing's listing in Hong Kong may help create buzz in support of its plans to expand its overseas operations, even if it does not lead to much share trading. By listing its shares by way of introduction -- that is without issuing new shares or selling down a stake -- the company will largely rely for liquidity on Morgan Stanley as its designated dealer. Fast Retailing's listing document cites the risk that "an active trading market in Hong Kong might not develop or be sustained."

     Institutional investors looking to buy or sell Japanese shares in volume will naturally turn to the Tokyo Stock Exchange as the most active marketplace. It is likely that liquidity in Fast Retailing's Hong Kong depositary receipts, trading in which initially accounted for about 5% of its issued shares, will soon dwindle.

     International companies that have had secondary listings in Hong Kong have generally seen poor trading activity. Only 0.02% of the shares of U.K. insurer Prudential are traded in Hong Kong. A similar percentage trades for Vale, a Brazilian miner. Even companies that have actually issued shares in Hong Kong as part of an IPO primarily conducted on another market have seen paltry results: only 0.37% of commodities broker Glencore Xstrata's shares appear on the Hong Kong exchange's clearing register. Like Prudential, its primary listing is in London.

     Japanese brands may have a bright future in Hong Kong. The companies that own them will find it much more challenging to entice the city's notoriously fussy and almost exclusively China-centric investors.

 Philippe Espinasse, an investment banker for nearly 20 years, is an independent consultant in Hong Kong. He is the author of "IPO: A Global Guide." His new book, "IPO Banks: Pitch, Selection and Mandate" will be published later this year.

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