|The call from Hong Kong|
Gateway to China, the archipelago wants to attract foreign companies to its stock exchange.
Vale shares have been traded almost 24 hours a day since 8 December, when they were listed on the Hong Kong Stock Exchange (HKEx). The mining company was the first Brazilian company to list deposit receipts for shares on the trading floor of the archipelago. Created in 2008, the HDR programs aim to attract foreign issuers to the Special Administrative Region (SAR) of Hong Kong. The city, a symbol of the meeting of East and West, has become more and more relevant in the global capitals markets, as has China, a country from which it enjoys autonomy, except for issues pertaining to defense and foreign policy. With market capitalization of US$ 2.7 trillion, 19% greater than one year previously and US$ 15.2 billion greater than that of Shanghai, the local stock market wants to be the entry point to the powerful Chinese capital market.
The countless skyscrapers and stores with venerable European brand names such as Armani, Gucci and Louis Vuitton give an international flavor to the Hong Kong scene and its seven million residents. By opening its doors to publically-traded foreign companies, the ex-British colony, already renowned as a multinational business center with low tax rates, is taking off, by presenting itself as an alternative to London and New York for fundraising. According to data from the local stock exchange, US$ 51.1 billion in initial public offerings (IPOs) was raised from January to November last year, 60.7% more than the total for 2009. Besides the alignment with the Chinese economy, the market has strong points such as a respected and consolidated judicial system and investors from all over the world.
Vale’s shares, which were already on the BM&FBovespa and in the New York (Nyse) and Paris (Euronext) stock exchanges, arrived in Hong Kong without a public offering. The main reason for the decision to be on the HKEx is the close relationship between the mining company and China and the plans to intensify it even further. As an important supplier of minerals and metals to the Chinese market, Vale’s sales to China comprised 37% of its revenues in 2009. The company also buys large quantities of machinery and energy generation equipment from Chinese companies.
At the launch of the HDRs, David Lau, co-director of the China Corporate Finance division at J.P. Morgan, indicated a regulatory issue for being listed in Hong Kong: in Brazil, foreign investors need to register with the Brazilian Securities and Exchange Commission (CVM) and the Central Bank in order to be able to invest in shares in Brazilian companies. In Hong Kong, there is no such requirement.
The Hong Kong Trade Development Council (HKTDC), a state-owned entity responsible for promoting and developing international commerce with Hong Kong, has been working to publicize its stock exchange. On 7 December in São Paulo, it offered a lunch to around 300 guests, including business people and representatives from banks, auditing firms and financial and capital market entities. On the occasion, John Tsang, the secretary of finances for Hong Kong, commented that Petrobras could be a potential issuer in the administrative region. Through its press office, the petroleum company declared that there was nothing concrete in the works with regards to Hong Kong.
But Christopher Jackson, assistant executive director of HKTDC, guarantees that, since Vale’s listing, other Brazilian companies have also begun negotiations with the stock exchange. He indicates the food sector as one of the strongest candidates for issuing HDRs. “Brazil has a lot of things that China needs. They eat a lot of Brazilian meat there”, says Jackson, by way of example. One of those possibly interested in doing business in Hong Kong is JBS Friboi, who was one of the guests at the lunch in São Paulo.
“For Brazilian companies, listed in Hong Kong means being in a stock exchange that covers the sectors that drive the growth of the country”, says Henry Law, corporate communications director of the Chinese stock exchange. The culture of investing in commodities makes the mining and food sectors very welcome in China, adds Paulo Sérgio Dortas, partner in the IPO area of Ernst & Young Terco, without forgetting petroleum and energy, which also have potential. Besides Petrobras, Brazil has CSN, which received a visit from the Hong Kong entourage on the same day that the Vale HDRs were launched.
The greatest ambition of Hong Kong is to confirm itself as the greatest financial center of Asia. Last year, the stock exchange has its first listings from France, Russia and Mongolia (cosmetics manufacturer L’Occitane, aluminum producer Rusal and coal supplier Mongolian Mining Corp, respectively), as well as a Canadian mining company with interests in Mongolia (SouthGobi). In 2009, it received the HDRs from a German company (the Schramm textile company) and from the Macau units of two large North American gaming companies (Sands China and Wynn Macau).
Several companies even went public in Hong Kong before being listed on the stock exchanges of their home countries. That was the case of French company L’Occitane, which carried out its IPO of 25% of its capital last year, raising US$ 707 million. The Asia-Pacific region is the source of 40% of the revenue of the cosmetic company, which intends to use part of the capital raised to expand internationally - the plan is to open 650 new stores all over the world in the next five years. According to information that the company released at the time, the choice of Hong Kong for its IPO was due to the prominence of the archipelago in the global financial market and the fact that it is the point of entry into the Chinese market, where sales of the cosmetics manufacturer rose 16.9% in 2009. Italian brand Prada, a top fashion brand, has followed the same route.
But why be in Hong Kong if, nowadays, investors can invest in any country, anywhere in the world? According to John Tsang, finances secretary of the SAR government, the market brings together some peculiar characteristics: “it is the only place in the world where the benefits of China and global benefits converge”, he says. According to Dortas, this tendency also aims to access sovereign Chinese funds, which cannot invest outside their country. “When a company gets listed abroad, it reaches certain types of investors that it didn’t previously have”, says the partner from Ernst & Young Terco. For example, the measure facilitates benchmarking analyses between Vale and Chinese mining companies.
Furthermore, Tsang emphasizes the fact that the Chinese and Brazilian markets complement each other. “While Brazil is rich in natural resources, China is a great consumer of these resources.” The BM&FBovespa has also studied partnerships with the HKEx. Henry Law, corporate communications director of the Hong Kong Stock Exchange, confirms that the CEO of the Brazilian Stock Exchange, Edemir Pinto, and executives from the Chinese trading floor are discussing potential avenues of cooperation. “They are interested in developing a dual-listing program, but there is still a long road if both parties decide to go ahead”, he says. Edemir Pinto revealed this project to CAPITAL ABERTO at the beginning of 2010 and later mentioned it publically on a number of occasions.
With an eye on the intensification of the relationship with China and other Asian countries, the Souza Cescon law firm opened its Asia Desk nucleus in February 2010, specialized in services for foreign investors that want to come to Brazil and for Brazilian companies that intend to invest in Asia. The group is led by a lawyer who was born and raised in China, and the team consists of around 15 professionals - all of whom speak Mandarin or other Asian languages -, established between São Paulo and Rio de Janeiro, all under the supervision of four partners. The creation of the nucleus was the result of demands from clients in countries such as China and India.
Maurício Teixeira dos Santos, partner at the firm has not taken any companies to Hong Kong so far. But he notes interest in sectors that generally do business with China, such as those involved in agricultural and mineral commodities. “Going there means attaining a diversified shareholder base and opening the doors to a strong market”, he says.