Lead managers CLSA and HSBC had to price a 182 million share IPO for Dah Sing Bank at the bottom of the range on Friday after the institutional order book closed just 1.1 times covered. Market participants describe the HK$2.3 billion ($296 million) deal as one of the most challenging Hong Kong IPO's of the year.
Pricing came just two days after a disappointing debut by Ping An. "It was very sad to see Ping An slip below its issue price when it had gone out of its way not to be greedy," says one banker. "It just shows that investors are very wary of the IPO market at the moment."
Dah Sing was additionally handicapped by fact that many prospective investors already held the parent and a large number had reacted badly to plans to spin off the banking assets. Since early March when news of its plans became know, Dah Sing Financial has fallen from HK$66.50 to HK$48.10, a drop of 27%.
However, observers say the order book did come together right at the end. "Investors treated this deal more like a secondary placement," says one observer. "They waited to see where Dah Sing Financial was trading on the day of pricing before committing orders."
Dah Sing Bank was marketed on a price range of HK$12.66 to HK$13.86 and priced at HK$12.66. This represented a 2004 price to book ratio of about 1.65 times. By contrast the parent was trading at about 1.72 times at the time of pricing, down from nearly 2.3 times earlier this year.
Typically, holding companies trade at a discount to the operating company, although in Dah Sing's case, this is slightly mitigated by the fact the parent is currently a more liquid counter. Dah Sing Financial has a market cap of about $1.52 billion and a freefloat of 47.8%, while Dah Sing Bank has a market cap of $1.477 billion and a freefloat of 20% pre shoe.
Post shoe, this will increase to 23%, with the group committing to hit 25% within the next 18 months.
Against its nearest comparable Dah Sing has also priced at a discount. Specialists say most accounts were looking at Wing Hang Bank, against which Dah Sing has historically traded at a 10% premium. On Friday, it was trading at about 1.9 times, which means that Dah Sing Bank has priced at a roughly 13.2% discount.
Observers say the institutional book was fairly solid, if not very large. "There were hardly any hedge fund orders and those investors that did participate were there because they wanted to be," one specialist notes. "There was very little order inflation, so allocations were filled."
About 75 investors were allocated with a geographical split that saw 65% placed in Asia, 25% in Europe (predominantly the UK) and 10% offshore US. About 30% of these investors are estimated to own Dah Sing Financial as well.
In addition 30% of the overall deal was set aside for the preferential tranche, whereby existing holders of Dah Sing Financial could buy one new share for every five held. This tranche ended up 60% subscribed.
The public offer closed four times subscribed.
Of the 20% share capital issued, 11% comprised primary shares and 9% secondary shares. Dah Sing Financial is using part of the proceeds to pay a special dividend and the remainder will be retained as a war chest to develop its insurance business.
The bank comprised 96% of the parent's HK$63.7 billion asset base in 2003 and 87% of its HK$993 million net income for the same year. Again it has earmarked proceeds for expansion in the Pearl River Delta region and part of the rationale for the spin-off was to facilitate this.
"If, for example, it buys another bank, it may be more palatable to offer a bank to bank share swap rather than a holding company to bank share swap," one observer concludes.
