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When Rusal raised HK$17.4 billion ($2.24 billion) through its initial public offering in Hong Kong back in January 2010, some pundits predicted that it would be the first of many Russian resources companies to list on the city’s stock exchange.
Foreign retailers such as Prada and Samsonite have followed in Rusal’s footsteps, but the influx of Russians has yet to materialise. That could be set to change soon. Russian companies are holding off listings worldwide at the moment as they take a wait-and-see view ahead of elections slated for December this year and March 2012, according to Jivko Savov, deputy CEO of capital markets and business development for En+, a Russia-based diversified mining, metals and energy group that holds a 47.41% stake in Rusal.
“Companies are spending this time focusing on developing projects, which only plays to their strengths and helps them when they do list,” he said during an interview with FinanceAsia.
Several attendees at a FinanceAsia and AsianInvestor conference this week — the second Russia Capital Raising and Investment Summit — said that major resources groups, ranging from hydroelectricity giant Eurosibenergo to molybdenum and iron-ore company SMR, are still considering Hong Kong listings. (SMR has been looking at a potential listing in Hong Kong for at least a couple of years and many observers expected that it would even trump Rusal, until the financial crisis forced it to put the plans on hold.) But it is not alone in considering Hong Kong as a new fundraising base.
“We have seen an increasing number of Russian companies looking at Hong Kong for listing,” said Dominic Li, managing director and head of the Hong Kong office of Rusal, which would be Russian companies’ go-to corporation to talk to about whether or not a listing in Hong Kong was worthwhile.
Companies aiming to list in Hong Kong need to be aware of both fundraising and strategic considerations. “Your capital markets decision must be complemented by a sound, well-articulated China strategy,” said Li.
Clearly, a rising number of Russian companies are exploring the China strategy.
As cross-border trade rises, so do the benefits that Hong Kong and Russia can bring to one another. Sergey Gritsay, consul-general of the Russian Federation in Hong Kong and Macau, pointed out that trade between Russia and Hong Kong exceeded $2.5 billion in 2010, which is up 63% on 2009. Another telling statistic is that HK$12 billion ($1.5 billion) worth of trade in goods between Russia and mainland China was routed through Hong Kong last year.
There are more than 1,000 Russians now living in Hong Kong, and 90,000 visited in 2010. This year, more than 100,000 will come to the special administrative region and, with the increase in the number of direct flights from Moscow to Hong Kong, business is set to grow.
But while trade is on the rise, why should we expect listings to increase?
“For those businesses ready to have a presence in Asia, Hong Kong is a natural choice,” said Ron Arculli, chairman of Hong Kong Exchanges and Clearing, noting there were more than 1,400 companies listed on the exchange with a total market cap of about $2.8 trillion, which puts Hong Kong about sixth in the world, depending on share prices on any given day.
Arculli went on to detail a laundry list of attractions of a Hong Kong listing — for example, the exchange caters to issuers of all sizes and offers exposure to China from the comfort of a major international financial centre.
“We have many strengths,” said Arculli. “We are a free-market economy; there are no restrictions on capital flow; low taxes; full-currency convertibility; a strong and respected legal and judiciary system; and our financial markets are subject to a robust, reasonable and fair regulatory regime with international standards and practices.”
He also pointed out that since 2003 companies that are listed and traded in Hong Kong generally have price-to-earnings ratios above those that are listed and traded on the major European exchanges. Finally, the investor base is diverse, he said, noting that some 46% of the exchange’s total market turnover comes from overseas investors.
Julia Leung Fung-yee, undersecretary for financial services and the treasury for the Hong Kong government, suggested that Russian companies should look at China’s success in listing here.
Tsing Tao Brewery was the first H-share company to list in Hong Kong in 1993. “This was the beginning of the transformation of the Hong Kong stock market from one that catered to mostly local Hong Kong companies to one that also caters to mainland China companies,” said Leung.
The synergies between China and Hong Kong are obvious; it is after all one country with two systems. But Leung and Arculli point out that Hong Kong is becoming a listing destination for companies outside of China as well, highlighting some of the recent high-profile international companies that have chosen to list in Hong Kong, including the Swiss producer and trader of commodities Glencore, Italian fashion retailer Prada and French cosmetics and skincare producer and retailer L’Occitane.
“Last year alone, international listing accounted for about 45% of the $58 billion raised in IPO proceeds," said Arculli. "In the first half of 2011, foreign issuers made up three of the six largest fundraising IPO exercises.”
He was referring to Prada, Samsonite and Glencore (though only about 6% of Glencore’s shares were actually listed in Hong Kong; the majority are quoted on the London stock exchange). Still, none of the speakers were advocating only listing in Hong Kong, but rather dual listings, as Rusal has done. Indeed, Russia is trying to build an international financial centre, and to that end, recently merged its two main stock exchanges, the Moscow Interbank Currency Exchange and Russian Trading Systems.
No one expects a flurry of Russian listings overnight, but Asia’s rising importance within the global economy makes it inevitable that fundraising will rise in time. Meanwhile, the increase in cross-border traffic is good for both Russia and Hong Kong. Indeed, Arculli, ever the practical man, concluded his opening remarks to the audience full of visitors from Russia with a more immediate Hong Kong pitch: “Please remember that in the summer most of our shops are on sale, so a little boost to our local economy would be greatly appreciated.”
