Its nice to hear someone being optimistic about the state of the equity markets for a change.
Patrick Colle: Well, we take a bit of a contrary view. We're incredibly bullish on Asia and have made the region our number one priority for growth. Were investing heavily in the business over here and have doubled our team over the last nine months. We now have seven people in Hong Kong, four in Japan and one in India.
Last year was the first that Asia surpassed Europe and Latin America for ADR capital raising. Some $11.8 billion was raised from the region, accounting for 40% of the overall figure. This trend has also continued into 2001, with Asia representing about 90% of all ADR capital raisings during the first quarter.
That seems quite strange given the lack of activity.
PC: Admittedly the figure was skewed by CNOOC (China National Offshore Oil Corporation), which probably accounted for nearly 90% of the total. That deal has been the largest ADR year-to-date. But the important point is that its success shows how quality companies can still complete offerings at the right price and right size even in awful markets.
Kenneth Tse: During the first quarter, I believe there were 22 new ADR programmes established, but only a couple of actual capital raisings. Siemens, for example, upgraded its OTC listing to a full NYSE listing in a deal also done by us. Aside from CNOOC, which raised $467.35 million from its ADR component, there was also a $51.14 million ADR by Alstom from France and a $13.4 million ADR by Infovista, also from France.
So is Asia now a sizeable component of the ADR universe?
PC: Not yet. It accounts for about 10% global capitalization. Europe is still very dominant because it's had such a long lead-time. The first ADR programme was established by the UK retailer Selfridges in 1927. European companies have been active since the 1950s, while Latin America and particularly Asia have been somewhat latecomers. But Europe has passed its high growth period now and we strongly believe that the next five years will be dominated by Asia. Both the NYSE and Nasdaq have been setting up offices in the region in recognition of this fact.
KT: If you look at the figures in more detail, you can see that at the end of 2000, Asia accounted for 9% of ADR investment under SEC 13-F filings. These represent US portfolio managers with more than $100 million under investment. At the end of the fourth quarter, Asia's market capitalization stood at $27 billion. Latin America was still a little ahead on $37 billion, representing 12%, while Europe was out at $247 billion, accounting for 79%.
Within Asia, Japan is still very dominant on 31%, or $8.6 billion of the total, with Australia not far behind on $6.9 billion, or 25%. The biggest increase has come from China and if you include Hong Kong, the two now rank third on $4.6 billion, or 17%. Korea accounts for 15% on $4 billion, Taiwan 7% on $1.9 billion and others, including Singapore, 5% or $1.5 billion.
What would you say your optimistic view is based on?
PC: In a word - privatization. If you look at China, there have been two decades of very successful reform and the country has now come to a juncture where its committed to privatizing and reforming state-owned enterprises. But what other market can offer the depth of capital available from the US market? Theres simply not enough equity capital in Asia to meet the equity needs of these very large companies.
The first Chinese companies to head towards the US didn't have a very happy history though.
PC: No, thats right. The original N share companies ran into a lot of difficulties. Their main problem was that they didn't often understand what it means to have a US listing. They didn't grasp the need to sustain their visibility and a certain level of professionalism with investors. But theyve learnt exceptionally quickly since then. CNOOC is just the latest example of a Chinese company thats made a successful debut on the NYSE and continued to trade well in the aftermarket.
What hurdles remain for the ADR market here?
KT: One of the main ones is lack of two-way fungibility between a company's ADR and its domestic shares. In most international jurisdictions, there's no prohibition on free flow between the two. If, for example, an investor decides that he or she wants to buy a local share and convert it into an ADR, then there shouldnt be a problem and vice versa. In Korea, Taiwan and India, this is still not the case. What ends up happening is that two separate pools of liquidity develop and one trades at a premium to the other.
In Taiwan, ADR's can be re-issued, but only up to the original float, while in Korea if I remember correctly, ADR's can now be re-issued, but only at the discretion of each individual company.
That can't be good news for an ADR house like yourself?
KT: Of course not. In competitive markets, we dont usually charge a fee for setting a programme up. We derive our revenue solely from cross-border transaction flows. Every time, an ADR is cancelled or re-issued, a five cents charge is imposed. The liquidity of a transaction is therefore key.
If there arent any restrictions, does liquidity often drift to or from the ADR pool?
PC: Its very variable and depends on a number of factors. One very obvious one is how well developed the local infrastructure is. Global investors want to focus on a company's fundamentals not the peculiarities of any local settlement system. For Latin American companies, its often the case that 60% to 70% of trading is in ADR form.
For well-known brand names like Nokia up to 60% might also be in ADR form, because the stock will attract retail as well as institutional investors. The home market, in this case Finland, is also quite small. In more developed markets such as the UK, Germany and France, on the other hand, the ADR will probably only account for about 10% of trading.
But generally, it does vary a lot and in Asia theres also the time difference to take into consideration. Because of the 12 hour difference, there isn't much arbitrage between the two markets.
Why would a company want to establish an ADR rather than a GDR?
PC: We view GDRs as a first step towards accessing international equity. A GDR does not require SEC style disclosure. For an emerging markets issuer that does not want to incur the time or cost of setting an ADR programme up, a GDR still makes more sense. If you look at a recent example, Dr Reddy's started off with GDR and has just recently upgraded to an ADR.
I'm not sure the London Stock Exchange would quite view the process in this light.
PC: Well I suppose not. But what it really comes down to is the strategy of each individual company in question. It's not just a matter of raising capital, but what that capital is being used for. An ADR is an acquisition currency in the US. If an outside company wants to buy a US company, then a London listing makes absolutely no sense whatsoever. This is particularly the case for the IT sector, which is very heavily US based.
KT: You also can't ignore the fact that America has the biggest equity capital market in the world. At the end of last year, total US investment in foreign stocks amounted to $1.8 trillion. Some 37% of this amount was in ADR form.
Once Asian countries build up a certain level of expertise and their accountancy and law firms are used to dealing with US regulations, then an ADR becomes a natural choice. Because it is so stringent, US Gaap is the best seal of quality a company can get.
How would you describe your Asian strategy?
PC: It has changed recently and were taking a far more pro-active stance. In the past, we always waited until such time that potential ADR issuers had reached the stage where they were ready for a US listing.
We also position the product very differently to our competitors. Where they view themselves as transaction processors, we see ADRs as more of an equity product that needs to be distributed to institutional investors. We see ourselves as an integrated equity and ADR house. We want to make sure that our ADR clients have the fullest access to institutional investors possible.
Are you seriously saying that the others don't compete on this basis as well?
PC: I am absolutely saying that. The Bank of New York sees itself as a processor. We process ADRs too. But the key consideration for any company should be to grow the liquidity of its ADR pool. Companies need to make sure they have visibility and the continual attention of international investors. This requires an ongoing investor relations effort. Aftermarket support is vital. Clients need to know what new investors they should be targeting. Should a company have just completed a non-deal roadshow in New York, for example, they might then ask us whether they should go to Denver as well. Our equity sales team will tell them.
But Citigroup might argue that it can bring in incremental demand through its huge retail distribution network in the US.
PC: Yes, but you have to remember that 70% of ADR trading is conducted by institutions and that for emerging market issuers like China the figure is even higher, more like 95%. A CNOOC or a Sinopec is not going to interest Mr John Smith from Wyoming. Its also the case that a firm may have all the pieces necessary for an integrated strategy, but not have fitted them altogether. JPMorgan's ADR business has been integrated for several years now, long before our merger with Chase.
Where would you say you are strong in the region relative to your competitors?
KT: Were very strong in Japan, while Citibank is well established in Taiwan. China is still open to all. We arranged the programme for CNOOC and in Hong Kong we also have the MTR Corp. Were also particularly pleased to have made such big strides in India. We were nowhere just over a year ago and now weve taken a 30% market share and even seen Dr Reddy's switch from Citigroup to us.
And Asia going forwards?
PC: Well Id like to reiterate our bullish view on the region and our role within it. Now that weve merged with Chase and Jardine Fleming, we intend to devote more and more resources to Asia. Were already seeing results and we believe that the prospects for IPO's or follow-on offerings from every single country in this region, even down as far as New Zealand, are very strong for the rest of the year.