The price was no surprise given the overwhelming demand for ChinaÆs largest private-sector bank, which has a leading position in the fast-growing consumer banking segment of the market.
Sources say the institutional portion of the $2.42 billion deal was about 50 times covered, while retail investors asked for 266 times the 5% of the offering initially earmarked for them. The subscription levels for both institutions and retail investors were the highest ever for a Hong Kong offering in terms of the dollar value of the orders û higher than those on the much bigger IPOs for Bank of China and China Construction Bank, according to one source close to the bookrunners.
On the institutional side, the record was achieved despite the fact that joint bookrunners China International Capital Corp, JPMorgan and UBS decided to cap individual orders at 10% of the total deal about three days into the roadshow.
However, demand is likely to have been boosted by the order flow from Hong Kong tycoons and corporates, who were not able to secure a set allocation before the bookbuilding started, as has become the common practice on high-profile China IPOs, but rather had to submit their orders together with everyone else.
At least 10 tycoons and corporates, including frequent IPO shoppers Li Ka-shing, as the representative for the Cheung Kong and Hutchison Whampoa group; Lee Shau-kee, the chairman of Henderson Land Development; and New World Development Chairman Cheng Yu-tung through his private investment vehicle Chow Tai Fook, have reportedly applied for shares, although it was still unclear over the weekend whether they would get any, and if so, how many.
But it wasnÆt just China Merchants that attracted the attention of investors over the past couple of weeks. Beijing Jingkelong, which closed the books for its once postponed IPO on Friday, saw its retail tranche more than 540 times subscribed, while the 90% institutional tranche was more than 60 times covered.
While JingkelongÆs offer was much smaller than China Merchants û $76 million after it too fixed the price at the top end of the range at HK$4.50 û both companies are essentially a play on the expectation that continued strong economic growth in China will support a rapidly growing and increasingly wealthy middle class.
Jingkelong, which operates hypermarkets, supermarkets and convenience stores in Beijing, is aggressively expanding its number of stores to tap into an expected shift from traditional wet markets and ômom and popö shops towards more modern stores. This expansion, which will result in a 60% increase in the number of retail outlets in the three years to 2008, should allow earnings to continue to grow ôas fast, if not faster, than the growth rate of consumer goods in Beijing,ö says one fund manager.
Jingkelong is currently expanding at a CAGR of 16%. As of the end of June, the company had 169 retail outlets, of which 68 were self-operated.
Meanwhile, China MerchantsÆ position as the countryÆs leading credit card issuer with a 31% market share of card spending should make it well positioned to capture a good portion of the anticipated strong growth in this market, analysts say.
China MerchantsÆ final price values the lender at about 2.44 times its estimated fully diluted 2006 book value, or at 2.16 to 2.39 times if the 10% greenshoe is exercised in full. That compares with an average 2.4 times forward price to book multiple for its three peers û Bank of China, China Construction Bank and Bank of Communications.
Given China Merchants reputation as ChinaÆs best managed and most profitable commercial bank and its low non-performing loan ratio, analysts have argued that the bank deserves to trade at a premium to its state-owned peers. One syndicate analyst puts this potential premium as high as 15% to 25%.
ôIf the share price goes up 10%-15% to iron out the IPO discount when it starts trading, then China Merchants will trade at a premium to all its mainland peers,ö says one observer, noting that BoCom currently commands the highest valuation among the three at about 2.53 times its estimated 2006 book value.
The final price pitches the lenderÆs H shares at a discount of about 3.8% to its A-share price, which equals about HK$8.88 after adjusting for the exchange rate and an Rmb0.18 per share dividend that only holders of the A shares will be entitled to. The A shares closed at Rmb9.34 on Friday after rallying 28% since the beginning of August.
Since there is no arbitrage between the two classes of shares, the comparison is somewhat academic, though.
China Merchants offered 2.2 billion new H shares plus a greenshoe of 220 million shares at a price between HK$7.30 and HK$8.55. Including the shoe, the offer accounts for 15.2% of the enlarged share capital. An initial 5% of the offer was set aside for Hong Kong retail investors, but given the strong demand this portion will be automatically increased to 20%.
JingkelongÆs smaller offer will also see a maximum clawback in favour of the retail tranche, which will be increased to 50% from 10% at the outset. Jingkelong wouldnÆt have had to offer a clawback provision since it is listing on the Hong KongÆs Growth Enterprise Market, but chose to do so to bring its IPO in line with those of main board listing candidates.
The supermarket operator, which is brought to market by DBS Vickers Securities, offered 36% of its enlarged capital or 132 million H shares at a price between HK$3.90 and HK$4.50. There is a 15% greenshoe, which could boost the total proceeds to $88 million.
The top-end pricing values the company at a 2006 PE multiple of 19.7 times, based on syndicate projections of 15% earnings growth this year. That pitches it in line with nationwide chain store operator Lianhua Supermarket, which trades at about 19.9 times its projected 2006 profit after gaining 12.5% in the past two weeks, and larger and more profitable Wumart Stores, which is valued at a 2006 PE of about 30.4 times.
While Wumart is JingkelongÆs main competitor in Beijing, the latter also has a wholesale and distribution business of which Wumart, among others, is a customer. This business contributes about half of JingkelongÆs revenues and makes it a unique play among its supermarket peers.
Market watchers say the strong demand for both these offers û at opposite ends of the market û shows that investors are keen to commit money to primary issues again after the market correction in May and the subsequent issue-thin summer period. However, some argue that China MerchantsÆ unique status could have exaggerated the interest, leaving the large pipeline of more ômiddle of the roadö listing candidates such as China Blue Chemical, the relaunched Shui On Land, and SPG Land to provide the real test of whether the IPO market is indeed back in full swing.
China Merchants will start trading on September 22 with Jingkelong following on September 25.
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