London-based luxury jeweler Graff Diamonds, which kicked off its initial public offering (IPO) roadshow on Monday, is expected to get a weak response from investors due to its "risky" business model and lack of brand awareness in Asia, market experts told CNBC.

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Graff, whose customers include Oprah Winfrey and the Sultan of Brunei, relies on a small customer base of ultra high net worth individuals for its revenues. In 2011, the company`s top 20 customers accounted for 44% of revenue, with one individual alone making up 13.2%.

"This business model is not typical of companies looking to go public, the risk is high. I have doubts that it will get a lot of interest," Jiong Shao, Chief China Strategist, Macquarie said.

Philippe Espinasse, former investment banker and Author of "IPO: A Global Guide", agrees that the company`s revenue model is among the largest risks for investors.

"Just looking at the one customer which accounted for 13 percent of sales in 2011, its revenue model is definitely an issue," Espinasse said.

If Graff raises its target of $1 billion, its IPO will be the second largest this year after Chinese brokerage Haitong Securities, which raised USD 1.68 billion in April.

Besides a limited revenue model that could deter investors, Shao says the market is also not in a position to welcome a big offering. The jeweler plans to list on June 7.

"In addition, market conditions in Hong Kong are poor and consumer demand for luxury goods in China is weakening. I`m not sure how successful the deal can be," Shao said.

Hong Kong, the world`s biggest IPO market in 2011, has seen a precipitous slowdown in listings this year because of market uncertainty. Companies have raised just HK$24 billion (USD 3.1 billion) via IPOs in the first four months of the year, compared to HK$260 billion (USD 33.5 billion) last year, according to figures from the Hong Kong Stock Exchange.

Espinasse agrees that current market conditions aren`t conducive for large IPOs, adding that the lack of brand recognition will also limit investor interest in Graff.

"Market conditions are very difficult, it`s surprising that they are trying to raise money. In this market, you need something that is cheap and a widely recognized brand," Espinasse said.

"Graff has a small number of stores in Asia, just 5, and its brand is not that well known. Clearly there`s a question mark here," he added.

Too Pricey

Espinasse says that the reported IPO price range of HK$25 to HK$37, (USD 3.20-USD 4.70), which translates into a valuation of 18 to 24 times 2012 forecast earnings, is too expensive, pointing to other luxury brands such as Prada, which is trading at 21 times.

"Prada has a much bigger platform in Asia, and they are a well-known brand here."

Graff`s peers in the jewelry sector such as US-listed Tiffany and Hong Kong jeweler Chow Tai Fook, are trading at price-to-earnings of 15 and 12.5 times, respectively.

He adds that Graff`s capital raising target of up to USD 1 billion is ambitious, forecasting the jeweler will only be able to raise around USD 600 million.

"There is a lot uncertainty over the valuation of the company and how the deal may go. Shares may have to be priced cheaply to fly," he said. Espinasse believes a price range of HK$20-25 would be able to capture more demand.

Phillip Chan, Director at Shenyin Wanguo Securities in Hong Kong agrees that pricing will be key to the success of the IPO, adding that "aggressive pricing" may not achieve that.

"As long as they (Graff) price it correctly, it will be alright," Chan said.

By CNBC`s Ansuya Harjani

Copyright 2011 cnbc.com

First Published:May 22, 2012 1:50 PM IST