The Hong Kong initial public offering market has failed to get off to a flying start in 2015 with the first $100 million odd deal of the year pricing towards the bottom end of its indicative range.
A 110 million share IPO (pre greenshoe) for outdoor advertising company Asiaray Media Group was priced at HK$6 per share on Thursday morning, in the bottom third of its HK$5.85 to HK$7.02 range.
The institutional order book closed a couple of times covered including the greenshoe, with the majority of participation from corporate and high net worth individuals. Some 69% of the deal went to six investors.
The retail order book closed just under two times covered. BOCI was sole lead manager.
The deal's reception adds extra weight to perceptions that investors are beginning the year sitting on the sidelines in risk-off mode, with little evidence of positive buying momentum.
On the plus side, Asiaray's IPO was anchored by two cornerstone investors, which accounted for almost 30% of the deal, as well as a sprinkling of orders from corporate investors developing long-term relationship with the company.
The two cornerstones are L Capital Asia, the private equity arm of the French luxury goods group LVMH, which took $20 million, and Shandong Peninsula on $10 million.They will be subject to a six-month lock-up.
The base deal raised US$85.16 million and represented 25% of the group's enlarged share capital, with a greenshoe of $4.26 million - cut back from 15% to 5% of the base offering size.
At HK$6 per share, Asiaray has been priced on a 2015 p/e ratio of 14.4 times. This places it in line with the Hong Kong average p/e of 14.3 times 2015 earnings but at a discount to China-focused consumer stocks, which are averaging about 19 times.
The company's main Hong Kong-listed peer is Clear Media, which has the biggest market share for digital display ads in the bus shelter sector of China's out-of-home market. The group is currently trading at 21 times 2015 earnings, around its five-year average.
There are also two comps in the US - VisionChina and AirMedia, which were both loss-making in the third quarter. The former has the biggest market share for digital display ads across China's mass transit system, while the latter has the largest market share at airports.
Asiaray is ranked fourth across the combined airport and mass transit sector, with a 4.2% market share of the former and a 5.16% market share of the latter. In the first half of 2015, it reported revenues of HK$612 million ($79 million) and a net profit of HK$91 million ($12 million).
The transport media segment of the out-of-home market is expected to outperform the overall digital advertising market over the next few years, with Frost & Sullivan projecting a Compound Average Growth Rate (CAGR) of 18.4% through to the end of 2018.
However, in the short-term sector valuations are likely to be heavily dependent on investors' view of China's GDP growth rate. Digital advertising and utilisation rates tend to fall when an economy is decelerating, but companies find it difficult to adjust because the rates they pay for their concessions are fixed.
The PBOC's chief economist, Ma Jun, believes China's GDP is likely to slow to 7.1% in 2015 compared to the government's 7.5% target for 2014.
However, the country is one of the few bright spots in a 2015 Asia Pacific Equity Strategy report published by UBS on Tuesday. The bank said that, "Asia ex-Japan has proved volatile to the Fed's first hike in the past. We don't expect a big correction but Asia's credit cycle poses risks for Hong Kong, Singapore."
But it added that China's monetary independence and reform initiatives could counteract this. "Downside to valuations is limited and rate cuts in 2015 may meaningfully ease macro concerns, which are already well understood by investors," it argued. "Fundamentals are improving - capex has slowed and margins are stabilising."
