The island’s IPO market has lost some gloss – but big firms still see it as a passport to China
THERE IS a strong scent of luxury in the Hong Kong stock market these days, as global brands queue to list on the Hang Seng, keen to take advantage of the territory’s proximity to the booming China market.
Hong Kong’s shopping precincts have long played host to premium names such as Prada and Samsonite; now these luxury firms are filing initial public offerings (IPOs) here.
Hong Kong was the world’s biggest IPO market last year, raising €40 billion from 87 listings.
However, this year, only one of the 16 firms that started trading after raising more than €70 million in an IPO here has risen from its offer price. Share values have retreated amid concerns about Chinese inflation and the taxing of capital gains, and the Hang Seng has registered its worst slump in 2½ years.
Italian fashion house Prada, which debuts today, lowered the ceiling on the pricing of its IPO and then sold shares at the low end of that revised price guidance, raising €1.5 billion.
Luggage manufacturer Samsonite dropped 7.7 per cent in its debut after selling shares also at the low end of a revised range, raising €870 million from its IPO on exchange.
The market slowdown means some would-be IPOs are having second thoughts. Prince Frog International Holdings Ltd, a Chinese maker of childcare products, delayed an IPO of about €140 million by a week to July 15th because of stock market fluctuations.
But while some of the gloss may have gone off the IPO market in Hong Kong, the longer term trend looks intact. Luxury brands are keen to raise their profiles in Asia so they can sell more products to the region’s growing ranks of affluent consumers, and Hong Kong can build on its position as the natural entry point to mainland China.
One senior executive, who asked to be anonymous because of stock exchange rules, described it as the “China premium”.
“These are generally European and American brands, which suddenly find themselves selling most of their goods to the China market, and other developing markets in the region,” he said.
A recent survey by the Boston Consulting Group showed that 1.11 million dollar-millionaires live in China, a rise of 31 per cent, boosted by economic growth, savings and a strengthening yuan. China is now in third place for millionaire households, behind the United States (5.22 million) and Japan (1.53 million).
The Boston survey almost certainly understates the level of wealth in mainland China, as it excludes the luxury items that are luring the big-name brands to China, such as works of art, fine wines and yachts.
Mainland China will remain the fastest-growing market for high-end goods in 2011 as sales rise 25 per cent to €11.5 billion, consultants Bain Co said in May. The country may become the world’s third-largest luxury market in five years, it predicted.
Prada’s listing breaks a lengthy run of unsuccessful efforts to list its shares. The Asia-Pacific region is the group’s single biggest market, with China driving a 63 per cent rise in net sales in the year to the end of January.
While the IPO may be at the lower end, the company still managed to get a valuation of about 23 times estimated full-year earnings, according to Bloomberg, whereas LVMH (Moët Hennessy Louis Vuitton), the world’s biggest maker of luxury goods, trades at 19.4 times projected earnings.
And Prada’s IPO is still considerably higher than that of Chinese shoe retailer Belle International Holdings Ltd, which at €900 billion is the largest to date for consumer goods companies in Hong Kong. Ahead of the IPO, Prada was 95 per cent owned by designer Miuccia Prada, her husband, Bertelli, and other family members. The luxury label includes the Prada name, as well as the Miu Miu fashion line and the Church’s shoe brand. Even after the IPO, the family interests are understood to control about 80 per cent of the stock.
Meanwhile, the offer for Samsonite, the world’s largest branded luggage maker, was four times oversubscribed by institutional investors.
Samsonite, founded in 1910 in Denver, Colorado, is honing its focus on developing its business in high-growth Asian markets, especially China and India. Asia accounted for about one-third of Samsonite’s sales last year, about the same as Europe but ahead of North America, which brought in one-quarter.
The Macau casino operator MGM China, which is controlled by the Las Vegas-based MGM Resorts International, is another recent arrival, raising €1 billion last month in what was the fourth largest global flotation of a gaming business, while upmarket second-hand fashion retailer Milan Station Holdings surged more than 70 per cent on its recent debut on the Hong Kong board.
Luxury is fast becoming part of Hong Kong’s DNA. In the auction houses, records were broken daily during the recent round of sales. Christie’s International set a record of HK$3.65 billion (€320 million) for a series of Hong Kong auctions, with most of the hotly sought after items from Chinese heritage, such as a €4 million pair of singing-bird pistols made of gold and inlaid with gems. Two Patek Philippe watches sold for more than $1 million each.
Combined with a desire to tap the increasing amount of Chinese capital flowing across the border into Hong Kong, the stock exchange is looking irresistible to luxury brands. The listings boom is driving a massive upswing in the fortunes of other sectors of the Hong Kong economy. Investment bankers, lawyers and executives are reaping the benefits, of course, but other sectors such as advertising and logistics are enjoying the trickle-down.
The main area of interest is the institutional investor, but Hong Kong’s liberal investment rules mean individual investors also play a role in the stock market, and these luxury brands are targeting smaller investment funds and sole investors in Hong Kong and China.
One of the highest-profile luxury brands in China is Luxembourg cosmetics maker L’Occitane International. It went public in China last year in a flotation that was 160 times oversubscribed.
