Both companies offered direct exposure to ChinaÆs fast-growing retail sector, which may have helped convince investors to commit. However, the outcome for the two stocks differed quite substantially and if it was short-term gains they were after, investors who placed their bets with TV sales company Acorn International are likely to have felt a lot better about their decision yesterday than those that put their money on handset manufacturer Qiao Xing Mobile Communications.
At $119.4 million, Acorn was the smaller of the two deals, raising 75% of Qiao XingÆs slightly downsized $160 million offer, but it was clearly the most popular.
The company, which is the largest TV direct sales business in China both in terms of revenues and airtime, attracted more than 200 investors to its offering and the book was over 15 times covered, according to a source. This allowed joint bookrunners Deutsche Bank and Merrill Lynch to fix the price at $15.50, or 6.9% above the top end of the initial $12.50 to $14.50 range for a valuation of about 30 times its projected 2007 earnings.
That valuation seems somewhat aggressive given that already listed Chinese consumption plays that have a greater track record and a better earnings visibility on average trade at 2007 price-to-earnings multiples of 30 to 35. However, China Seven Star Shopping, which also offers TV sales and trades in Hong Kong following a backdoor listing, is currently quoted at a forward P/E of about 40 times.
The latter is expected to have played a key role as investors pushed AcornÆs share price as high as $22.72 at one stage and then kept it steadily around $21.40, more than 35% above the IPO price. While Acorn is seen as a market leader in its field and should potentially command a premium to Seven Star, the latter has received a lot of attention particularly from Hong Kong retail investors in the run up to AcornÆs offering, which may have pushed its valuations somewhat ahead of its fundamentals. That said, at $21.40 Acorn is valued at a 2007 P/E multiple of about 41.
Sources say investors liked AcornÆs growth prospects, which are underpinned by the fact that TV sales currently account for only about 0.1% of total retail sales in China, compared with 7.5% of the total retail sales in the US. The company is also offering its product partners an alternative sales channel through its network of 20,000 retail outlets, which means it is able to extend the life cycle of each product beyond the time it appears on the screen.
Acorn offered 7.7 million ADS û each accounting for three common shares û of which 6.7 million were new and 1 million came from existing shareholders. The total deal size is equal to 25.8% of the company, which gave Acorn a market cap of about $1.4 billion at the time of listing. After the sharp first day gains the market cap will be closer to $1.9 billion, however. There is a greenshoe that could boost total proceeds to $137.3 million.
The deal was extensively marketed in the US, so itÆs no surprise that about 60% of the allocation went to US investors with 30% ending up in Asia and 10% in Europe.
The strong outcome does give a nod to the ECM franchises at Deutsche and Merrill, which took over the Acorn IPO as recently as three months ago when Credit Suisse and Morgan Stanley were ousted after working on the deal for about a year.
Meanwhile, Qiao XingÆs first day trading was less convincing û albeit still solid - with the stock hovering just above its $12 IPO price for the first two thirds of the session. According to a source, investors did have a mixed view on the valuation, however, with some buying on the basis that it was cheap in relation to its growth prospects and others selling short amid a belief that it wonÆt be able to compete with international players like Nokia and Motorola in the longer term.
The large trading volume û about half the IPO size was turned over in the first few hours û seemed to back up that observation, although others said the bookrunners were also actively stabilising the stock to prevent it from dipping below the offer price.
Qiao Xing, which is one of the leading domestic makers of branded handsets in China, priced its offering at the mid-point of the $11 to $13 indicative range after the deal was said to have been about five times covered. More than 100 investors came into the UBS-led deal, although the demand from US investors was a bit lower than normal for a NYSE listing at about one third of the total offering. Asian investors took another third, while the rest was split between European and Middle Eastern accounts.
One source says US investors, who are used to getting free, or heavily subsidised handsets with their subscriptions, had trouble understanding how the average selling prices can be above Rmb1,000 ($140 per unit in 2006) and were sceptical that this would be sustainable.
And while the company has done well over the past three years, churning out high growth rates and gross margins of more than 20%, there are concerns that brand building can be a costly business. Beijing-based Qiao Xing sells all its mobile phones under its own CECT brand and 100% of its current production is sold in the domestic market.
ôMost people agree that the company will do fine in 2007 and 2008 as the entire market continues to grow, but the question is how it will fare against competitors like Nokia and Motorola in the longer run - in 2009 and 2010,ö one observer says. He adds that it should be possible for the company to improve its market share to close to 10% from just under 3% at present, but to go beyond that will be much more difficult.
Qiao Xing sold 13.3 million shares, or 25% of the company. Of the total, 94% were new shares, while the remainder was sold by existing shareholders. The greenshoe of 2 million new shares may boost total proceeds by up to 15%. The deal was initially planned to comprise 16.7 million shares, which at the final price would have resulted in a $200 million transaction. However, when the price was fixed below the top of the range, the selling shareholders decided to reduce their part of the offering to 833,334 shares from 4.2 million, which cut the total deal size by $40 million.
At the $12 IPO price, the company is valued at about 11 times it 2007 earnings, which puts it at a premium to other listed Chinese handset manufactures which trade at 5-10 times. However, most of these tend to focus on the low end of the market, while Qiao Xing is increasingly focusing on high-end and differentiated products that generate higher profit margins.
Many of the more high-profile Chinese handset makers, such as TCL, Bird, Haier or Lenovo, are part of larger diversified companies, which makes valuation comparisons difficult. International competitors, including Nokia and Motorola, trade at about 15-16 times this yearÆs earnings.
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