The secondary markets may have turned cautious, but Hong Kong's primary equity market remains as zealous as ever. Global equity markets are retreating from recent highs on fear of tighter monetary policy in China and concerns over eurozone debt. After tumbling 2% yesterday, Hong Kong's Hang Seng Index is down 6% in the past five trading sessions. Yet, the city’s IPO market remains sizzling hot.
The latest highlight from the active market comes from Goodbaby International Holdings, a children’s product maker in China, which raised HK$1.47 billion ($190 million) in a Hong Kong IPO that was nearly 1,460 times subscribed by retail investors. The strong demand triggered a full clawback, which increased the retail offering to 50% of the deal from 10% originally.
Goodbaby overtook Evergreen International as the most heavily oversubscribed retail offering so far this year. The Chinese menswear group saw the 10% retail portion of its $140 million IPO 1,231 times subscribed last month (pre-clawback). In terms of actual money, Goodbaby attracted $27.7 billion worth of retail orders, compared with Evergreen's $17.2 billion. By comparison, AIA Group's retail tranche, which at $1.48 billion was 77 times larger than Goodbaby's, drew $14.4 billion of orders from the Hong Kong public.
Jiangsu-based Goodbaby sold 300 million shares at the top end of an indicated price range of HK$3.70 to HK$4.90 per share, helped by the hefty demand, which was evident in the institutional tranche as well.
“We needed to limit the demand to no more than 10% of the deal for each institutional investor,” one source said. Even so, the institutional tranche was still multiple times covered by around 300 investors.
Most of the accounts were long-only funds, but there were also orders from wealth management groups. The majority of the demand came from Asia-based investors.
Hong Kong's IPO market is routinely busy in the third and fourth quarters of most years. However, this year is phenomenal. Each of the major investment banks has a list of new issuers waiting to launch their deals and timetables stretch to the Christmas week. As one investment banker said: “I have been working in this area for more than 10 years and I have never seen a quarter as busy as this. Many companies are keen to go public before the new year.”
“Last year, total equity funds raised through IPOs in Hong Kong exceeded $31 billion, ranking us in first place globally. Already this year we have broken our 2009 record; the total IPO funds raised so far in 2010 exceed $40 billion,” Hong Kong’s financial secretary, John Tsang, said at the First Annual Emerging Markets Investor Conference on Monday.
Based on Goodbaby’s forecast earnings for 2011, the IPO price translates into a price-to-earnings (P/E) ratio of 16.4 times. That is a significant discount to Goodbaby’s competitor Boshiwa, whose HK$4.98 IPO price represented 19.1 times its 2011 projected earnings. However, Boshiwa's share price has gained 30% since its September debut (to HK$6.48 yesterday) and is now trading at a 2011 P/E of 24 times. Boshiwa raised $368 million in its IPO.
Not all newly listed consumption plays maintain their popularity in the secondary market though. The share prices of two otherwise-popular companies dropped substantially below their IPO prices when they started trading yesterday.
Leoch International, a Chinese lead-acid battery producer that raised $230 million, fell 16%, and Shirble Department Store, a Shenzhen-based department store operator, tumbled 17%. Leoch's Hong Kong public offering was 260 times subscribed and its institutional tranche was more than 26 times covered. Shirble's $177 million IPO was 10 times and 26 times subscribed by institutional and retail investors, respectively.
Goodbaby's offering consisted of 67% primary shares and 33% secondary shares. The deal also has a greenshoe of 15%. The listing is scheduled for November 24. Morgan Stanley is the sole global coordinator and bookrunner.
Goodbaby made a HK$141.5 million net profit in the first seven months this year, which represents a 42.4% increase compared to the same period in 2009.
Last year, it made HK$164.4 million in profit, down from HK$173.5 million in the previous year. The decline was due to the global financial crisis as the economic downturn made consumers more cautious about their spending, the company said.
As of July 31, 2010, Goodbaby's distribution network covered 28 provinces, autonomous regions and municipalities in China and it had 5,297 maternity and childcare specialty stores, 835 hypermarket outlets, and 664 department store outlets. It has 451 distributors in China.
