The pricing at HK$5.80 per share was no surprise after the offering attracted about $14 billion in total demand as investors were keen to get some exposure to ChinaÆs highly regulated book publishing and distribution industry at a time when it is undergoing extensive market-opening reforms.
The listing candidate also got a boost after China announced a week ago that it would expand its qualified domestic institutional investors (QDII) scheme to also allow commercial banks to buy overseas equity. The move sparked a knee-jerk flood of buying into Hong Kong-listed H-shares which are expected to be the first category of stock that Mainland investors will buy, on the basis that they are already familiar with these companies. The immediate frenzy died down after a couple of days upon a realisation that this wonÆt happen overnight, but market watchers argue that QDII will remain a long-term positive for the state-owned companies that are listed in Hong Kong.
Xinhua Winshare didnÆt see the same rapid build-up of retail orders as some of the other recent IPOs, but after word started to leak out about the momentum in the institutional book two days before the close of the deal, retail investors too decided to pile in.
When the deal closed yesterday (May 22) the 10% retail tranche was a bit over 120 times covered, which equals about $3.3 billion worth of demand, according to a source. This triggered a full clawback, which increased the size of the retail portion to 50%. All-in-all about 80,000 applications were received from retail investors.
Institutional investors submitted about $11 billion worth of orders, which works out to a subscription ratio of about 80 times post-clawback. The conversion ratio from the roadshow was close to 100% with high-quality participation from all the targeted areas; Hong Kong, Singapore, the UK and the rest of Europe as well as the Middle East.
One source estimates that about two-thirds of the demand came from Asia with the remaining third from Europe, the UK and the Middle East. Given the relatively small deal size, the company did not meet with US investors.
Xinhua Winshare offered 369.4 million new H-shares, or 33.5% of its enlarged share capital at a price between HK$4.50 and HK$5.80. The top of that range pricing means the company will have a market capitalisation of $818 million at the time of listing. However, there is also a 15% greenshoe which could lift the total deal size to as much as $315 million and the market cap to $859 million.
The listing was arranged on a sole basis by BOCI Asia and marks the second largest sole book IPO in Hong Kong this year after Intime Department StoreÆs $311 million offering, which was led by Morgan Stanley.
At the final price, the company is valued at 20.8 times its fully-diluted 2006 earnings, or at 21.9 times on a post-shoe basis. This translates into a slight discount versus overseas peers, including US-listed Barnes & Noble, Borders Group and Books-A-Million which trade at an average 2006 price-to-earnings multiple of 23 times.
While not cheap, Xinhua Winshare is expected to continue to grow at a faster pace than the US-listed bookstore chains as it opens more and bigger stores. According to the source, institutional investors still see room for valuation multiple expansion, though, as they believe the companyÆs highly leverageable distribution system and its strong, solid management should allow it to act as a consolidator within the industry.
ôThis is a highly fragmented market but having been able to get money earlier than everybody else, Xinhua Winshare should be able to position itself as a leader with regard to acquisitions, both within the Sichuan Province and outside,ö he says.
However, most analysts feel a discount to overseas players is justified given the risks associated with an evolving industry.
A member of the state-owned Xinhua Bookstores group, the company derived 81% of its revenues last year from the distribution of textbooks and educational supplements, but is one of the early movers in response to the ongoing reforms both with regard to vertical integration and geographical expansion
Xinhua Winshare currently has 193 stores of which only two are outside the Sichuan province and is planning to spend Rmb300 million to Rmb500 million to expand its retail network over the next three to five years. In addition, the company is also in the process of building a nationwide agency business that will bridge the gap between the small publishers and retailers across the country.
In anticipation of the eventual opening up of the countryÆs publishing industry, Xinhua Winshare has also started to provide ancillary services to publishers of supplementary educational materials over the past few years. The aim is that it will be able to integrate ôbackwardsö into this industry as well once it becomes allowed.
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