Action needed to reverse cross-border IPO flight

Blue-chip exodus perpetuates unhealthy patterns at mainland bourses

Technology giant Legend Holdings has grabbed headlines in recent days with news of a record investment by its private equity arm in a leading British pizza chain, its first major overseas foray. The deal saw Legend's Hony Capital agree to pay $1.6 billion for the PizzaExpress chain, as part of a growing trend by Chinese mainland firms to invest in the overseas food and retail sectors.

The purchase comes as Legend gears up for an IPO as early as later this year, offering investors a chance to buy into a diversified group whose biggest asset is its controlling stake in PC giant Lenovo. But the bigger headline in the Legend story is reports that the company is strongly considering staging its listing in Hong Kong rather than the Chinese mainland.

Legend has yet to announce a location for its IPO, though founder Liu Chuanzhi said several years ago that he would prefer to list on the mainland. But recent media reports have indicated the company is weighing a move to Hong Kong, most likely due to a large backlog of other companies waiting to list on local markets after an IPO freeze that lasted more than a year before its recent lifting.

The loss of a world-class company like Legend to Hong Kong would mark the latest in a long list of similar losses that have seen some of the mainland's most promising firms trade on offshore stock exchanges. The securities regulator should take steps to reverse this trend by giving special treatment for these homegrown blue-chips to list at home. It should also revive stalled plans for an international board that could become a fertile ground for both domestic and foreign blue-chip listings that are currently in woefully short supply for local investors.

Such moves to boost the quality of listed companies could help bring back some excitement and confidence to the languishing market that has lost two-thirds of its value over the last six years. Such a longer term strategy could also help end the unhealthy series of boom-bust cycles that have plagued the mainland's stock markets in the quarter century since their inception.

Hony is one of the mainland's oldest and most respected private equity firms, whose investments include not only Lenovo but also top electronics retailer Suning, building equipment giant Zoomlion and drugmaker Simcere. Since its inception in 2003, it has invested in more than 70 companies with combined assets of 1.65 trillion yuan ($270 billion).

The company made one of its biggest investments to date with the purchase of PizzaExpress, which operates 500 restaurants worldwide. It bought the chain from private equity firm Gondola Group, which was purchased by a private equity fund for 1.3 billion euros ($1.8 billion) in 2007.

Hony's announcement comes as media attention intensifies around Legend, following media reports last month saying the company could make its IPO by the end of this year and that Hong Kong was becoming a strong contender for the listing. Just weeks later after those reports, Hony announced another major purchase when it said it would pay 1 billion yuan for an undisclosed stake in a leading domestic dental clinic operator.

The flurry of news and deals from the company is likely to intensify as the IPO nears, as Legend tries to generate positive buzz in advance of its offerings. If it goes to Hong Kong, Legend would join Lenovo, along with other major mainland blue-chips, like the country's three major telecoms carriers that now trade in that market. One of the mainland's other top private equity firms, Fosun International, is also listed in Hong Kong, and another investment giant Citic is currently trading there as well through a backdoor offering.

If Legend is really abandoning its previous plans for a domestic listing, mainland securities regulator should try to lure it back with special incentives and even establish mechanisms that would give similar preferential treatment for other blue-chips looking to go public in Shanghai and Shenzhen. It should also revive plans for an international board in Shanghai, which could host many of the country's best companies that are now forbidden from listing at home because they are technically registered overseas.

Such moves could help convince wary investors - both domestic and big qualified foreign institutional investors - to put more of their money into the market, helping pull it out of its current doldrums and ending its destructive cycle of booms and busts.