|Type of paper:||Case study|
|Categories:||Company Asia Financial analysis Leadership style|
Pros for Listing Prada on Hong Kong
Listing of Prada in Hong Kong would lead to significant benefits for the company, as it will increase market recognition as well as the increasing customers' preference for luxury products. More significantly, Prada would be the second company to be listed on Hong Kong from the Western European companies after the first company called L'Occitane International, and the company's eponymous fashion brand would enhance consumers' appetite (Que, & Fairley, 2013). Understandably, Prada may significantly gain from the increased valuation with a market capitalization of approximately $ 10 billion that would reflect a potential EV/EBITDA in the high teens and would be more expensive if the international competitors are trading around 12X/ 13X (Que, & Fairley, 2013). Additionally, the company would experience a significant flow-back from one market to the next because the investors aim at trading on the exchange, which is more active in the international market.
The other benefits would be experienced if the Hong Kong public offering is greatly oversubscribed, and it becomes successful; whereby, the automatic claw-back leads to limited allocation of stock in Europe (Que, & Fairley, 2013). Again Prada will benefit from the growing significant purchasing power as well as the lack of competing for stock in Hong Kong, thereby allowing the company to target huge-affluent customers. Notably, the company's seeking its success in other international markets would be a good strategy, but the move to execute double listing may hinder its performance, hence weakening its investment case and eventually causing the financial crisis to the company.
Cons for Listing Prada on Hong Kong
When Prada decides to bypass the western capital markets, it would be the first fashion house but the second luxury group after L'Occitane to list in Hong Kong. The company gained up to $ 704 million in the public offering that attracted more demand from the institutional investors (Que, & Fairley, 2013). Unfortunately, Prada ignored many attempts listing in Milan, assuming that the market condition had been unfavorable. Since the United States and Europe are still experiencing an economic crisis, Prada may capitalize on the Hong Kong existing liquidity bubble. More precisely, the listing of Prada in Hong Kong would mean an economical move towards Asia, which is contrary to the flow of money that can suddenly change but the growth of disposable wealth in Asia (Que, & Fairley, 2013). Also, by listing with Hong Kong, the stock market would have an excess depth to support deals around the world, and not only on the fashion products but on any other exchange globally.
The Risk of Getting Listed
The risks of getting listed in Hong Kong are significant. The risks can be based on several issues, including bad timing: with a fall of markets in the United States and Asia, it is equally difficult for the investors to muster up their enthusiasm to purchase new shares and several initial public offerings (IPO) have also weakened. For instance, Luggage Company fell on its first trading with approximately 11%, after selling its shares at the lowest price possible (Que, & Fairley, 2013). It is, therefore, possible that Prada can also experience a fall with a significant percentage in its first trading day. Additionally, a mining company in Australia shelves its shares, and the Chinese Macau Casino Operator is currently trading far much below its debut prices. Again the market has been soft, and most companies have a strategy of a wait-and-see concept; therefore, Prada may also face a greater challenge if other factors are not considered.
Additionally, listing the company in Hong Kong would be risky because its success is not assured. Even though the institutional investors are purchasing the fashion company's shares, most of the local investors are reluctant and are complaining of the higher valuation of the shares in the stock market. Also, since Hong Kong does not incorporate the double taxation treaty, the customers who purchase the Prada shares would be liable to a tax of approximately 12.5 % on the earnings through disposing of the holdings (Que, & Fairley, 2013). And, the customers will be affected by the imposing of the withholding tax of about 27% on the payout dividend (Que, & Fairley, 2013).
Risks of Being Listed
It is worth noting that the international companies are subject to various set of laws which govern their affairs such as the duration, share transfer, right of the shareholders, and their dispute resolutions. Therefore, Prada, being listed in Hong Kong, would subject it to different rules and regulations that may not be favorable. Also, it may be a problem for the shareholders of Hong Kong to enforce their rights against the company because of many complications that might come from other companies. Notably, Hong Kong may not have appropriate enforcement and investigation jurisdictions but may rely on other companies (Que, & Fairley, 2013). If Prada's principles of operations and assets are not within its operation and the operation of Hong Kong, it can be subjected to other restrictions, risks, and standards that may greatly differ from those of the Hon Kong.
Comparable Valuation Approach
IPO Price Using Price-To-Earning Ration (P/E Ratio)
The P/E ratio is used for valuing a company that determines the prices of its shares relative to the per-share earnings. The ratios are utilized by the investors to measure the value of the shares. Notably, the investors can assess the company's P/E ratio to determine if the prices of the shares can precisely represent the expected earnings for every share. The formula for calculating P/E ratio is as follows:
P/E ratio= Market value per share/ Earnings per share
The total stock price for all companies = 823.10
Earnings per share = 14246
P/E ratio= 0.0578= 5.7%
For Hong Kong = 2660 * 0.0578= 153.75
Using Forward EV/EBITDA
EV/EBITDA refers to the ratio which is used to compare the enterprise value to the earnings before interest, tax, depreciation, and amortization. It is used as a valuation metric for comparing the value of different companies. The ratio informs the investors of how many times they have to pay for the EBITDA to acquire the company.
IPO price for FY 2010 = average EV/EBITDA * Company EBITDA
= 14658/15 * 164
= 977.20 *164
FY 2011 = 16886/15 * 197
= 1125.73 * 197 = 221769.47
FY 2012 = 18910/15 * 238
= 1260.67 * 238= 300038.67
Free Cash-Flow to the Firm (FCFF)
FCFF= EBIT (1-t) + Depreciation and Amortization - Cap Expenditure - change in Working Capital
FY 2008 = 190 (1- 0.164) + 92-159+12 =103.84
FY 2009= 187 (1-0.166) + 103-118-62= 78.96
The weighted average cost of capital refers to the financial ratio that is used for calculating the cost for acquiring and funding assets of a company through weighing between equity and debt structure. Thus, WACC is utilized in measuring the weight of the cost of borrowing and the debt based on the current rate of debt and equity of the company.
WACC= E/V * Re + D/V * Rd * (1-Tc)
E- Market value total equity
V- Total market value of equity and debt
Tc - income tax rate
Re- Total cost of equity
Rd - Total cost of debt
D- Market value of total debt
Therefore; WACC = 0.0855= 179569/14246 * 823.10 * 12247/14246 * Rd * (1-0.276)
0.0855 Re = 12.60*823*0.86*0.724
0.0855 Re = 6456.65
Re = 75516.40
Therefore, WACC is equal to 8.55% because the total cost of debt is found to be 75516.40.
WACC = 8.55%
Terminal value= FCFF * (1- growth rate) / (WACC - growth rate)
= 103.84 * 1-0.025/ 0.0855 - 0.025
Pre-Money Share Price and Post-Money Share Price
The pre-money share price refers to the company's value, excluding any external financing. Thus, it is how much the startup of a company worth before any additional investment. The concept provides information on the current value of the company as well as the value of every share that is issued to the investors. Contrarily, the post-money share price evaluates the value of the company after additional investments; hence the value includes external financing.
Post-money share price = investment amount/ percent investor receives
Pre-money share price = post-money valuation - investment amount
Post-money= 14437.4/ 2500 = 5.77 + 2500= 2505.77
Pre-money = 2505.77- 2500 = 5.77
Que, A., & Fairley, J. (2013). IPOs in Hong Kong. Bus. L. Today, 1.
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