Roadshow advice for one of the largest international financial hubs and the world's gateway to China
Hong Kong is unique for having a society where eastern and western cultures live harmoniously. Incense-filled temples sit side by side with gleaming glass and iron skyscrapers. Hong Kong is also home to one of the biggest and most international financial hubs in the world, which is appropriately called Central.
In terms of institutional equity under management, Hong Kong is the second largest financial center in Asia-Pacific after Tokyo. The local buy side manages around HK$1.2 tn ($153 bn) collectively, according to December 2003 data from the Hong Kong Securities and Futures Commission (SFC). Hong Kong’s history as a former British colony is reflected in its financial system, which includes a relatively flexible regulatory landscape and an internationally focused buy side.
Hong Kong plays host to many of the Asian arms of large international institutions including Fidelity, HSBC, Allianz and Merrill Lynch. ‘Hong Kong’s sophisticated, liberal, transparent and multi-currency capital market is a big attraction for onshore and offshore money managers,’ points outs Vanita Sehgal, director of Citigate Dewe Rogerson in Hong Kong. ‘The territory’s long history of British-style merchant banking, investor-friendly environment, strong rule of law and position as the gateway to China all contribute to making it a popular choice for institutional investors.’
In addition to the big international institutions, there is a wide range of fund types, such as Hong Kong’s public pension fund – Mandatory Provident Fund (MPF) – SFC-authorized retail funds and private client funds.
‘The investment community in Hong Kong comprises institutional and retail investors,’ explains Sehgal. ‘On the institutional side, many of the world’s leading asset management companies are based here, forming a large pool of institutional investment capital. Retail investors also play an important role in Hong Kong’s capital market in terms of liquidity and creating momentum for new issues. Indeed, retail investors have contributed to the success of recent IPOs in Hong Kong, including those of Air China and China Power International.’
Hong Kong investors fall into typical categories in terms of investing style: there are Garp, growth, value and momentum players. And, as with any other big financial center, because of its diversity and size, it is difficult to pin down a prevalent investment style. Doing research to determine which institutions will most likely be interested in your company’s story – and so ultimately bring value to your stock – is recommended.
Robert Gardner, director of capital markets intelligence at Thomson Financial’s corporate group in Hong Kong, warns of the city’s ever-growing hedge-fund industry.
‘There is a very large pool of fast money in this city,’ he says. ‘Hong Kong has always had a ‘sprint to wealth’ element to it, and that is apparent from the growing numbers of hedge funds. ‘The larger investors fall within the Garp/growth spectrum, as they tend to be associated with larger international investment houses. Most offer a diversified balance of products between value and growth, so it is key that the appropriate portfolio manager is identified prior to any meeting.’
Stella Chen, former IRO of Shanghai-based Linktone, a provider of wireless value-added services to mobile phone users in China, agrees. ‘[Hong Kong-based investors] usually look for market leaders or emerging leaders,’ she says. ‘They tend to pay more attention to Chinese opportunities and, in contrast to US and European investors, are more tech-savvy.’ Likewise, Hong Kong investors are very keen on domestic issues, with 73 percent or HK$878 bn worth of assets under management invested in Asia, including $481 bn in Hong Kong and China in 2003, according to December 2003 figures from the SFC.
What to expect
When presenting in this town expect investors to be very friendly. ‘But understand that some investors are very straightforward and pushing for the facts,’ points out Chen. ‘Some rarely ask questions but they definitely have their own opinions, which company IROs need to guess.’
‘The most important thing to keep in mind is to be absolutely committed and believe in what you say,’ says Jason Yeung, head of IR at Hong Kong-based Bank of China. ‘It is not about selling your story – it is about selling your belief and it has to be a belief that your company will bring a quick return to investors. The message will come through if you really believe in what you are saying; disclosing the good news as well as the downside will provide a balanced and fair story, and investors will appreciate that.’
Most buy-side firms rely on sell-side research and their own in-house research to analyze potential and current investments. Therefore, when going to an investor meeting in Hong Kong, expect more strategy-type questions than figure-focused queries. ‘Fund managers will be looking at the market capitalization, earnings potential and growth outlook of the industry, as well as the company’s governance structure and its quality of management,’ explains Sally Wong, executive director of the Hong Kong Investment Fund Association (HKIFA).
Publicly available data indicates that most of the larger buy-side institutions in Hong Kong have strong holdings in the consumer discretionary and industrials sectors. These sectors have been major beneficiaries of China’s runaway growth in recent years. ‘Foreign companies able to demonstrate they are similarly benefiting from this regional growth might have a better chance of securing buy-side capital,’ says Gardner.
Alternatively, for IROs wanting to tap into some of the local private investor funds, it is wise to make your company’s name and financial brand known. ‘IROs can reach retail investors through technological channels such as the IR web site and audio and video webcasting, as well as through the local media,’ notes Sehgal. ‘Retail investors tend to buy and hold on to a stock – so they have more of a long-term investment outlook than institutional investors or hedge funds. Given that these investors are less sophisticated in terms of technical analysis, they are more likely to select stocks with equity stories that are easy to understand and corporate brands that are familiar to them. Finally, retail investors look for stable returns, so dividend-paying stocks are attractive to them.’
Learning the ropes
Hong Kong fund managers require regular access to management through one-on-one meetings. As such, it is essential that companies plan Hong Kong roadshows ‘at least twice a year,’ advises Sehgal. Usually, senior management should visit investors at their offices. But some investors also like to meet management for tea or coffee in a relatively casual atmosphere.
It is important to remember that the sell side still holds the key to the buy side in Hong Kong, so meetings should be set up through a broker or sell-side company.
‘The investment community in Hong Kong is rather diverse,’ notes Yeung. ‘There are institutional investors such as fund managers as well as high-net-worth individuals and large corporates that often invest in IPOs. It would be difficult to access these people, particularly the large corporate and high-net-worth individuals, unless you go through the sell-side brokers who keep a close relationship with them.’
Getting around Hong Kong’s financial center is very convenient, with most institutions located within walking distance of one another. Two days in the city is enough time to conduct several worthwhile meetings. Depending on your CEO’s or CFO’s disposition, scheduling six to eight one-on-one meetings per day, with each meeting lasting one hour, is quite feasible.
Avoid taking senior management to Hong Kong during Chinese holidays. On Chinese New Year, for example, businesses close for a minimum of three days – so it is a good idea to check a Chinese calendar when planning roadshows to avoid such dates. Also, summers in Hong Kong can be unbearably hot, so you might want
to steer clear of the city during July and August. If you must go at that time, however, bring an extra change of shirt for each day.
Finally, Hong Kong has been a good place to do business for centuries, and that’s still the case. The city’s investing community is one of the wealthiest on the continent and is very foreign-friendly, not to mention Asian stock-keen. By learning the ropes of how this city’s financial center works, chances are a visit from senior management might lead to surprising results, and an exciting multi-cultural experience.