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The Hong Kong advantage

The Hong Kong advantage
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First Published: Thu, Jun 30 2011. 08 57 PM IST

The luxe factor: China’s demand for luxury goods has fuelled a boom in Hong Kong. Kin Cheung/AP
The luxe factor: China’s demand for luxury goods has fuelled a boom in Hong Kong. Kin Cheung/AP
Updated: Thu, Jun 30 2011. 08 57 PM IST
I was in Hong Kong last week, and the buzz in this luxe-loving city wasn’t about the latest “it” bag—it was about the newest luxury IPO. Prada just raised $2.1 billion (around Rs9,500 crore) and began trading on the Hong Kong Stock Exchange on 24 June.
You may well ask why a deep-rooted Italian company like Prada is saying pass to the Milan Stock Exchange—and for that matter, Paris, London, New York, all arguably better roosting places for a luxury stock—and heading East instead to Hong Kong? And it is not the only upscale Western brand turning eastward for money—a couple of weeks ago, the 100-year-old American luggage firm Samsonite’s IPO raised $1.25 billion, also in Hong Kong. The French cosmetic brand L’Occitane pulled off $700 million the year before. The American brand Coach, which trades on the New York Stock Exchange, announced plans to double-list in Hong Kong by the end of the year.
Why is Hong Kong suddenly the “it” bourse for luxury IPOs? There are two forces that are driving this trend—one, a heavily skewed “Asia-centric” luxury demand, which has companies thinking “let’s IPO where my consumers are”; and two, in a jittery world Hong Kong is a relatively better place to raise money. Let’s look at each of these forces.
Asians, the world’s biggest luxury consumers
For most industries the centre of gravity is rapidly shifting (or has already shifted) to the high-growth economies of Asia—for the luxury industry the shift is that much more pronounced. In fact, it is utterly lopsided—Asians have been the world’s largest luxury consumers for over two decades. In the 1980s and 1990s the Japanese were head over heels in love with luxury; as development spread, other Asian nations began their own love affair with designer brands; and now the Chinese are besotted so much so that they are already the biggest consumer base for many major brands. Here is where the fun begins—the Chinese are still in the early stages of luxury consumption, in the coming years they will grow from big to huge to ginormous, and brands are gearing up to ride that growth wave. And then there is India, which is showing all the early signs of luxe-infatuation. If the present and the future of luxury are anchored firmly in Asia, why not raise money right here.
The luxe factor: China’s demand for luxury goods has fuelled a boom in Hong Kong. Kin Cheung/AP
This trend is a significant break from the past, when luxury companies safely listed on home turf—Moët Hennessy-Louis Vuitton (LVMH) in Paris, Burberry in London, Tiffany in New York—whereas the new line of thinking seems to be to “make your consumer your investor”. This blurring of lines is interesting, creating a new breed of Asian “consumestors” who buy your products and your shares. Perhaps a luxury share is a product in its own right—reportedly many retail investors asked for Prada shares in paper format to frame and hang on the wall! Coach sums it up well—its Hong Kong listing, if approved, will raise awareness among “investors and consumers in the China market as well as throughout Asia.”
“Expansion plans for China” was a major part of the IPO pitch for Prada, but bear in mind that expansion plans for pretty much any part of the world will ultimately serve the Chinese as they globetrot in droves. According to the Chinese Tourism Academy, 65 million mainland Chinese were expected to travel abroad in 2010, spending an estimated $55 billion—a hefty chunk of which would no doubt go towards their favourite travel activity: shopping for luxury brands.
Samsonite, too, highlighted its solid Asia credentials during its IPO roadshow. Asia made up a third of its net sales in 2010, it was the most profitable region, and grew a whopping 45% over 2009. Three of Samsonite’s top five markets are in Asia—China, India, and South Korea.
Hong Kong, the world’s biggest IPO market
If there is one company that understands black swans, it is Prada. It has made several attempts to list its stock, but like a bride jilted at the altar, it had to withdraw each time, struck by one calamity or the other, including 9/11 which sent markets tumbling. To break that jinx, Prada turned to Hong Kong—the world’s biggest IPO market for the last two years. In 2010, the Hong Kong Exchange raised $57 billion, which according to Ernst & Young, accounted for 20% of the global total. As a comparison point, the Bombay Stock Exchange raised $8.3 billion in IPOs in 2010.
Prada started well enough with sales to institutional investors— reportedly subscribed five times over—but sales to Hong Kong’s normally ebullient retail investors the week after were hit by choppy weather: The Hang Seng slumped, mirroring falling markets worldwide, on fears around Greece defaulting, and a pesky Italian dividend/capital gains tax discouraged them further. It affected Prada’s pricing—at HK$39.50 (around Rs230) it went towards the lower end of its guidance, thereby raising $2.1 billion as against a best-case scenario of $2.6 billion.
I still call that success. A share price of HK$39.50 values the company at 23 times its 2011 forecast earnings, well above its peers LVMH, Burberry, Richemont, Coach, which trade at a much lower 18-20 times 2011 earnings. Sweet. According to JP Morgan, kingpin LVMH is trading at 19.3 times 2011 earnings—which pegs Prada at a 20% premium to LVMH. That is the Hong Kong advantage—a higher valuation is possible.
The city’s strong base of retail investors is another Hong Kong advantage. The fact that they are ardent luxury “consumestors” is best demonstrated by the curious case of Milan Station, which notwithstanding its name, is a Hong Kong company that has a chain of stores selling second-hand luxury handbags. The public portion of its IPO in May was oversubscribed 2,180 times, an all-time record for Hong Kong, and possibly for the world. The share sale froze $7.5 billion in margin financing orders alone.
While Hong Kong seems to be suddenly in fashion for luxury companies, it has got me wondering about a question closer home: Could it be worthwhile for Indian companies, long accustomed to looking West for international IPOs, to turn East instead?
Radha Chadha is one of Asia’s leading marketing and consumer insight experts. She is the author of the best-selling book The Cult of the Luxury Brand: Inside Asia’s Love Affair with Luxury.
Write to Radha at luxurycult@livemint.com
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First Published: Thu, Jun 30 2011. 08 57 PM IST