HONG KONG (Dow Jones Investment Banker) – Logically, there’s reason to offer around-the-clock trading on securities: Investors can trade from their home turf some of their large holdings. But Vale S.A.’s Hong Kong listing shows the value of such an option is questionable in practice.
Multiple listings generally see wide differences in liquidity across markets, with the vast majority of investors preferring to trade on the most active home exchange. Multinational corporations often find trading volumes on secondary exchanges to be too low, and those keen to generate global interest must therefore look at other strategies.
Raising capital or selling down shares, or their equivalent in the form of depositary receipts, helps, especially if these are marketed widely, as investors across a variety of jurisdictions are then able to acquire sizable positions. Even in such cases, flow-back often occurs, over time, to the company’s home market.
Creating visibility is otherwise down to investor relations, PR and corporate broking activities that must be carried out at length.
Despite this, Hong Kong saw quite a show Wednesday when Vale, a global behemoth with a market capitalization in excess of $173 billion, hung its name in the local stock exchange. The Brazilian iron-ore group is already listed on the New York Stock Exchange, NYSE Euronext in Paris and the BM&FBOVESPA in São Paulo.
But how much trading will Vale see on the Stock Exchange of Hong Kong? Turnover in the common Hong Kong depositary receipts (or HDRs) reached $6.4 million on the first day, helped by a week of road shows across Asia’s main financial centers. But liquidity halved the following day, and was less than $170,000 by the end of the week.
This compares poorly with the NYSE, where Vale sees the lion’s share of its trading, with an average daily volume of around $640 million, or its home base Brazil, with an average turnover of around $96 million. Trading activity in Paris, meanwhile, is down to about five figures in dollar terms, verging on complete illiquidity.
Vale’s trading in Hong Kong is likely to be further constrained since the listing was made by way of introduction without offering securities for sale or subscription to the market, so investors have been unable to acquire large holdings at the outset, and must rely on JP Morgan as designated dealer to help channel liquidity from the U.S. to Asia.
– Not The First –
Vale isn’t the first to see such discrepancy in liquidity between its primary and secondary listings.
Prudential PLC, the U.K. financial services group, also boasts multiple listings. Its Hong Kong and Singapore foray in May 2010 was to drum up Asian support for its attempted purchase of AIA Group Ltd. However, trading has since been negligible on the Asian exchanges, while daily liquidity in the U.S. is around $4.4 million, which pales in comparison to the London Stock Exchange’s $74 million.
Hong Kong, which has seen more than $50 billion in IPO proceeds so far in 2010, relaxed requirements for the listing of new applicants earlier this year. Given recent, high-profile IPOs there, Western companies find it increasingly attractive to pursue a listing in Hong Kong, also on account of its relatively higher valuations.
Italian fashion house Prada SpA, has for a long time mulled a listing on the Hong Kong stock market, and so have many Russian companies eager to replicate and capitalize on the opportunity created by the IPO of Oleg Deripaska’s United Co. Rusal.
The quest for multiple listings is not new, of course. In the late 1980s and early 1990s, many Western companies sought secondary listings in Japan, attracted by its high PEs. But they delisted en masse after a few years as local investor following never fully materialized and disclosure requirements and costs took their toll. In the U.S., listings of ADRs by non-U.S. companies have also been in decline.
– L’Occitane’s Solution –
One company that figured out a bold strategy for its flotation is L’Occitane International SA.
The French cosmetics group decided to list only in Hong Kong in May, a well-thought out move based on its long-standing presence and market recognition among retail investors in Hong Kong. It also made sense given the company’s significant business interests across Asia. Despite a rocky start at the height of the Greek financial crisis, its share price has increased more than 40% since its IPO, with daily liquidity in excess of $6.5 million.
But it seems that companies that are new, lesser known or with limited commitment to Asia may just have to sit it out.
(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. To comment on this column, please email [email protected])
[This article was originally published on Dow Jones Investment Banker on 11 December 2010 and is reproduced with permission. It also appeared on WSJ.com, the website of The Wall Street Journal]
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