(Pictured: James Gruber)

Insiders are bailing out of Hong Kong property, retail and financial services and the likely buyers of various big assets on the block are “dumb institutions”, analyst James Gruber says in his latest note to clients over the weekend.

Gruber’s newsletter, ‘Asia Confidential’ says it is no surprise that the smart money is getting out of Hong Kong because of high valuations and dimming prospects for the territory. But his analysis of likely buyers may surprise Australian and other international investors.

Gruber says: “The question then becomes: which institutions may be buying these assets and why would they be purchasing them? Three companies are reportedly in contention to buy ParknShop: China Resources Enterprise, Japan’s Aeon and Australia’s Woolworths. For Wing Hang Bank, Australia’s ANZ is thought to be a frontrunner. And for Chong Hing Bank, Chinese conglomerate YueXiu Group is in line to buy it. 

“The potential buyers have several things in common:

• All of them are not run by owner-operators. That is, they’re not run by people with substantial proportions of their own wealth invested in the companies. This means the CEOs are likely to take risks that owner-operators wouldn’t because they have less to lose.
• Almost all of them are publicly-listed. YueXiu isn’t listed but subsidiaries are. It means most of these companies are under shareholder pressure to perform in the short-term. M&A is often perceived as an easy way to boost earnings (not returns) and improve share prices.
• A number of the companies are growth-starved and are desperately looking for a growth angle to excite investors. And let’s face it, Hong Kong and China are still some of the sexiest growth stories going around, at least in the eyes of many institutions. 

“As for the spin-offs of AS Watson and Hongkong Electric, institutional investors will be the backbone of coming IPOs. Many of these investors are also not run by owner-operators. They’re also subject to the same short-term performance pressures as listed companies, if not more so. The vast majority of institutional investors are judged on performance month to month and they know their jobs are on the line if they underperform.

“As you can imagine, that doesn’t make for sensible, long-term decision-making. But it goes a long way to explaining why institutional investors are likely participants in the Hong Kong IPOs. They’ll be looking for a short-term spike in share prices post-IPO before they cut their holdings or exit altogether. Anything to boost near-term performance…”

Gruber’s advice to investors is: avoid blindly following institutions which tend to move in herds; not get sucked into hot investment trends; focus on purchase price, which institutions often don’t; and be a shareholder in an owner-operated company which may be sold to “the schmucks known as institutions”.

Full newsletter: http://asiaconf.com