Prada’s Hong Kong listing confirmed the growing attraction of the Asian investor base for global brands, pointing the way for more to follow.
Despite some intense market volatility, Italian fashion house Prada managed to set an important precedent in June with its HK$19.20bn (US$2.47bn) Hong Kong IPO. The deal valued the company at a higher price than its western rivals, showcasing Hong Kong’s appeal as a venue for listings of the world’s top luxury brands.
Global equity markets have been volatile this year amid worries of a worsening European debt crisis, China’s monetary tightening and a slower US economic recovery.
These choppy conditions have made any fundraising extremely difficult. The jumbo Chinese IPOs of recent years are now a thing of the past. These have been replaced with a slew of financial rights issues amid countless pullouts of public listings. Against such a bleak backdrop, the completion of Prada’s listing stands out as the largest Hong Kong IPO of the year.
Prada’s decision to list in Hong Kong, however, raised eyebrows from the start. All its main rivals are listed on European stock exchanges and the company’s earlier efforts to go public over the last 10 years had focused, unsurprisingly, on bourses closer to its Italian home. Only a handful of foreign listings, meanwhile, had tested Hong Kong’s stock market – to mixed results.
Rusal, the first Russian company to float in Hong Kong, struggled to attract investors and plunged after listing in January 2010. More recently, Australian miner Resourcehouse cancelled its Hong Kong IPO after a dismal response from investors.
French skincare products retailer L’Occitane and US luggage-maker Samsonite International completed relatively successful IPOs in Hong Kong, but neither competes among the world’s top luxury brands in the way that Prada does.
Prada, however, pressed ahead with an IPO that was aggressive by any measure. The company marketed 423.3m shares (14% primary/86% secondary) at an indicative price range of HK$36.50–$48.00 apiece, representing a 2011 P/E of 21–27 times.
Among Prada’s peers, British luxury goods group Burberry was trading at 21.5 times forecast 2011 earnings, while LVMH, the owner of Louis Vuitton and Fendi, changed hands at 17 times at the time the price range was set.
At the top of the indicative price range, Prada’s valuation was also higher than the average P/E of 26.2 times for Hong Kong-listed luxury goods companies, such as luxury watch retailer Hengdeli and L’Occitane.
Although many institutional investors reckoned Prada’s offering was expensive, the institutional book was covered on the first day of bookbuilding as investors viewed the Italian fashion house’s float as a rare chance to buy into a top luxury brand with robust growth.
Sales of luxury goods are expected to benefit from a rapidly growing middle class in emerging economies, especially China.
Deteriorating market conditions just before Prada set the final pricing finally pushed the issuer and its bankers to price the deal in the lower half of the price range at HK$39.50. The retail portion of the deal was also well undersubscribed. Still, the final price represented a premium of about 20% to the average forecast P/E multiple of London-listed Burberry and Paris-traded LVMH.
In contrast to the earlier experience of overseas-based Rusal, Prada’s shares held up well on the company’s June 24 trading debut, closing up 0.26% at HK$39.60. The greenshoe was later fully exercised to raise an additional HK$2.5bn.
Prada’s success, however, is not something that other foreign companies can easily replicate. “Unlike many foreign companies that are eyeing a Hong Kong listing, Prada has a real Asia angle. It has stores in China and Hong Kong and investors are familiar with the brand,” said a banker, who worked on Prada’s transaction.
Prada has four luxury brands – Prada, Miu Miu, Church’s and Car Shoe – and its sales in the PRC are growing rapidly. In a pre-deal report, Goldman estimates that sales in the PRC now account for 7% of the group total of €2.05bn (US$2.96bn) and sales in China (including Hong Kong and Macau) are 19%. Goldman believes about 30% of global retail sales are to Chinese customers.
Last week, Prada reported forecast-beating first-half results – thanks to the surge in demand in Asia and more store openings. The company’s net profit jumped 74% year on year to €179.5m from €103m. That compares with the company’s forecast of no less than €150.7m in its fiscal first half, according to its listing prospectus.
Prada’s success has spurred more overseas companies to consider Hong Kong listings. NYSE-listed Coach, the biggest US maker of luxury handbags, is also looking at a secondary listing in Hong Kong before the end of the year through the sale of depositary receipts.
According to Coach CEO Lew Frankfort, a dual listing in Hong Kong will raise awareness of the company’s brand among investors and consumers in the China market, as well as throughout Asia.
Other potential foreign listing candidates include Italian motorcycle maker Ducati and British sports-carmaker Aston Martin. The two companies are looking at listing options, with Hong Kong one of the venues under consideration.
Sports carmaker Ferrari has been circled by banks for a Hong Kong listing, but the issuer still has not made up its mind yet about the IPO.
Credit Agricole CLSA, Goldman Sachs, Intesa Sanpaolo and UniCredit were the leads on Prada’s IPO. The company’s shares rose to an all-time high of HK$50.90 on July 27, and closed at HK$38.75 on September 21.
