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Jan 06, 2011

Behind the scenes: Vale’s HDR listing

A look back at how Vale raised its profile in China through Hong Kong depositary receipts

As Standard Chartered’s Indian depositary receipt (IDR) proved, doing anything for the first time can be time-consuming – and costly. For Standard Chartered, overcoming bureaucratic hurdles in India was one of the biggest barriers to the issuance of its IDR in May last year.

Those in Hong Kong eyed the transaction with interest. Launched two years ago – when the global IPO market was still beset by uncertainty – Hong Kong’s equivalent – the HDR – had been slow to take off. Not only were market conditions prohibitive, but there were also significant legislative hurdles. Vale announced its plans to issue the first HDR in September 2010 and went to the market in December. According to those familiar with the situation, however, behind-the-scenes conversations with Vale started well over two years ago.

A normal listing (ordinary shares or HDR) on Hong Kong’s exchange, the HKEx, takes five or six months, and for foreign issuers it is a two-step process. First the issuer has to ensure the regulator accepts the jurisdiction, a process that involves comparing domestic regulations in the country of origin with Hong Kong regulations. If and when the jurisdiction is accepted, the HKEx begins considering the listing application.

‘With an IPO you have to consider legal costs, underwriting costs and listing fees,’ says Kenneth Tse, managing director of DRs at JPMorgan. ‘Hong Kong’s listing fees are relatively low but in terms of legal costs it is comparable with the UK, and for underwriting costs Hong Kong is comparable with the US.’ He notes that issuers can benefit from cost savings for secondary listings; the fees are 25 percent of the price of a primary listing in Hong Kong. ‘Legal and underwriting fees are also cheaper for this kind of listing,’ Tse adds.

The cost of profile raising
Despite the cost savings associated with additional listings, being the first HDR comes at a price. Vale, a company with a market cap in excess of $160 bn, was willing to stump up the legal fees for getting its jurisdiction approved. It already had a listing on Bovespa in Brazil, Euronext Paris and on the NYSE via an American DR.

The HDR is being recommended for international companies with a large proportion of sales in China – Vale received nearly 40 percent of its revenue from China in 2009 – and is a useful device for raising company profile. Another benefit for issuers is that it lengthens the period of time during which investors can trade your company’s securities; Vale’s stock can now be traded continuously for nearly 20 hours. Those at JPMorgan who were involved in the HDR say such a listing gives companies a greater presence within the Chinese market, and it could also ultimately be useful for those that want to fund expansion in the mainland.

‘This is an important factor to consider when you look at the future of both the China and Hong Kong markets, particularly when you consider the recent currency reforms and the gradual shift toward the internationalization of the Chinese renminbi (RMB),’ points out King Ho, vice president of depositary receipts at JPMorgan. If, as some predict, the RMB becomes a currency of choice among corporates and financial institutions globally, Hong Kong will increasingly be looking to raise its profile as an offshore RMB center.

Retail investors were also interested in the Vale HDR even though, at HK$270 ($35), its issue price was at the expensive end of Hong Kong stocks and the issue had a minimum figure for investing of $HK13,000. Turnover on the first day of trading was brisk, reaching $6.4 mn, although that figure sank to less than $170,000 by the end of the first week of trading.

Vale’s listing could pave the way for more Brazilian companies: the same week vale listed, the chairman of HKEx embarked on a visit to Brazil to bolster interest in Hong Kong as a listing destination. All this ties in with the HKEx’s expansionary strategy. ‘HKEx has been working to make itself a more attractive destination for international issuers,’ says Tse. ‘It has already amended its rules on share registers, which makes it easier for companies from jurisdictions such as Russia, South Korea and India to list.’

Singapore Exchange and the ADR platform
It’s not just the Hong Kong exchange that is stepping up its game: Singapore Exchange (SGX) recently launched a platform allowing investors to trade American depositary receipts (ADRs) in Asian companies with a market capitalization of more than $600 bn.

The board, called GlobalQuote, was launched in cooperation with NASDAQ OMX and BNY Mellon on October 22. The Singapore platform brings the ADR listing to trade in Singapore and it requires no extra work or costs for the issuer.

Companies on GlobalQuote include Aluminium Corp of China, Baidu, China Mobile, China Telecom, China Unicom and Suntech Power Holdings. The platform could be of particular benefit to companies such as Baidu and Suntech, which don’t have Asian home exchanges, SGX says.