Western stock markets aren’t the only ones suffering from euro zone malaise. Markets in Asia are seeing investor fright as well, with Asia’s IPO capital, Hong Kong, seeing the fourth major withdrawal in a week. Graff Diamonds had planned a $1 billion offering, but followed the lead of three other companies that decided a continually falling Asian market was not the right climate in which to launch.
Reuters reported Thursday that Hong Kong has seen its deal volumes drop 85% in the first five months of 2012, compared with the same period a year ago. In the Asia-Pacific region as a whole, deal volumes are down by a third. The debacle over the recent $16 billion Facebook IPO did not help to restore confidence to investors, either.
China Yongda Automobiles Services Holdings Ltd., which is China’s largest distributor of BMW automobiles, canceled its plans this week to raise as much as $430 million in Hong Kong. Another company, Sany Heavy Industry Co., was said by people familiar with the deal on May 30 to have cut the size of a planned share sale in Hong Kong to $2 billion.
Graff had planned to price its offering on Thursday, with sales beginning June 7. As recently as Sunday, it was upbeat about the prospect, with CEO Francois Graff quoted saying, "We are building the book every day, we have tremendous interest in the company across the board, we are very happy."
However, after U.S. and European markets lost more than 1% on Wednesday, the company chose instead to postpone the offering, with an individual connected with the IPO saying, "We decided at the end of the day that it would be better to wait for a better time." On Thursday Asian markets followed the West into negative territory, with an MSCI pan-Asia index falling 1.6%.
Luxury goods in particular have suffered, with spending slowing in China and stocks of companies falling substantially along with the markets. Since May 7, the Hong Kong-based Hang Seng stock index has dropped 12%—just when Graff executives together with advisors and bankers began to meet with fund managers and institutional investors to evaluate demand for the offering. Tiffany & Co. has dropped 14% over the same period, and the jeweler Chow Tai Fook saw its own share prices plummeting 23%.
Tiffany is priced at 15.1 times earnings; just last week it cut its own forecasts for profits and earnings. Graff’s company valuation, according to a Bloomberg report, indicated by its proposed stock price, was between 18 and 24 times annual earnings, as set by the bankers handling the IPO—a price that is “too expensive for the current market to digest,” Jason Yuan, head of research at Pegasus Investment Management in Beijing, said in the report.
Spending for luxury goods in Hong Kong is brisk among Chinese tourists, who take advantage of its lower tax rates and do their heavy spending there rather than on the mainland. But year-on-year sales growth in jewelry, watches and valuable gifts fell to 17% in the first quarter from 37% in Q4 of 2011, Bloomberg reported.
Still in the pipeline is Formula One, the racing company, which plans a deal worth up to $3 billion in Singapore—thus far scheduled for June, although its chairman, Peter Brabeck, said last week that he had not yet given the final approval to proceed. Also on deck is the Chinese state-owned insurer PICC Group, which intends to bring in up to $6 billion in a dual listing in Hong Kong and Shanghai.
With the support of funds of other government companies and by China's sovereign wealth fund, the IPOs of Chinese state-owned entities are usually protected from considerable market volatility.
On Thursday the largest Asian IPO so far in 2012 launched in Malaysia, with Felda Global Ventures Holdings, the world's third-largest palm plantation operator, preparing to come to market on June 28 in what is expected to be a $3 billion offering.
Felda is not in the same class with Graff, in that the Malaysian government plans to use the sale to provide more than $500 million to landowners prior to an election. Alan Tan, fund manager for Asian equities at Lion Global Investors in Singapore, was quoted saying, "The chance of it being successfully listed is quite high."
Other companies, however, are bowing out for the time being. Jim Krapfel, an IPO analyst at Morningstar Inc. in Chicago, was quoted saying, “The global IPO markets are dead until European Union issues abate, worldwide economic indicators improve and the overall stock market regains some footing. No company wants to go public at a time when investors are applying the brakes.”
In a statement, Graff Diamonds more or less bore that out, saying of its own postponed IPO, "Consistently declining stock markets proved to be a significant barrier to executing the transaction at this time," but also added, “The company is committed to growing its business and will continue to do so irrespective of today’s announcement.”
The CEO said that demand for high-end diamonds will only increase across Asia as the numbers of “super rich” increase. He should know. The company is dependent on just 20 customers for nearly half of its revenue. Still, Graff, which directly owns 18 stores across the world, plans to open another 11 in Asia—five this year in Hong Kong, Shanghai, Macau, Hangzhou and Tokyo, and six others elsewhere in Asia.