HONG KONG — Poor market sentiment played a large role in Graff’s decision to scrap its Hong Kong listing, but the company’s relatively high price was also detrimental to the offering, according to market watchers here.
Graff said Wednesday night that it was postponing its initial public offering plans due to “adverse market conditions,” making it the third company to pull the plug from its IPO in Hong Kong this week. Two Chinese companies, a copper producer and an auto dealer, scrapped plans for a Hong Kong listing. Also this week, Ascendas Hospitality Trust called off its $621 IPO in Singapore.
Ben Collett, head of equities at Louis Capital Markets in Hong Kong, said that while concerns about China’s slowing economic growth played a large role in the cancellation of other recent IPOs in the city, the lack of demand for Graff shares likely came down to price.
“Anyone that is talking about mega riches in a decelerating market is unpopular. I have no idea why they thought they were worth that,” he said.
Graff had set its preliminary price range between 25 Hong Kong dollars, or $3.22, and 37 Hong Kong dollars, or $4.76, per share. The midpoint of the price range would value the company at $3.48 billion. That range came out to 18 to 24 times the estimate for 2012 earnings, multiples some observers have said seem high.
A Graff spokeswoman in Hong Kong declined to comment beyond the company’s cancellation statement.
Graff hasn’t said when or if the company might approach the market again, but Collett believes the pulled deal might be “damaging for the brand.” “I wouldn’t touch it even if they came back,” he said, noting that a large portion of the proceeds was intended to go towards buying assets from founder Laurence Graff.
Aaron Fischer, analyst at CLSA in Hong Kong, said he believes there would have been stronger investor demand if the price were around 14 times earnings, “which is closer to where some of the comparable companies are trading.”
He added that investors were concerned about Graff’s small concentrated customer base, which could provide for weaker earnings visibility than some other luxury goods companies. Also, the company’s planned reorganization meant that most of the IPO proceeds were not staying in the company.
Despite the slew of canceled IPOs this week, Fischer remains optimistic about Hong Kong as a market for IPOs. “Hong Kong remains one of the better locations for future luxury IPOs given that Asians are the most important luxury goods customers globally,” he said.
But luxury companies may want to lay low for the time being, according to some observers.
“The luxury market seems not to be focus of the market right now, particularly as many believe economic growth will slow down and will hurt luxury goods consumption in China,” said Castor Pang, strategist at Core-Pacific Yamichi International Ltd.
“Investors were worried about the market and the IPO price was not attractive. If they were interested in the company, they can just wait for the IPO to list; [the price] could pull back and they could buy it at a cheaper price,” said Pang.