Korean-owned camera module manufacturer, Cowell e Holdings, completed its Hong Kong initial public offering towards the lower end of its indicative range on Wednesday after a core group of investors were able to leverage their price sensitivity into a lower valuation.
The China-based Apple supplier raised HK$884 million ($114 million) from the 208 million share deal after pricing it at HK$4.25 per share. The offering had originally been marketed on a HK$4 to HK$5.75 range, later narrowed to HK$4 to HK$4.50.
Cowell priced towards the bottom of its range on the same day that Fuyao Glass priced at the top amid rising demand for Chinese stocks and a fairly empty new issue pipeline. The contrast was partly due to the fact that investors viewed Cowell's dependence on Apple as a potential weakness rather than strength.
The institutional order book nevertheless closed about 3.5 times oversubscribed with participation from just over 70 accounts. According to one source close to the deal, there was a late surge of momentum after three anchor orders came in for more than half the deal in the last couple of days of roadshows.
One fund manager told FinanceAsia that the anchor accounts had been looking at deal for some time, but did not want to put their orders in too early in case they, "heated the order book up too much," pushing the pricing higher.
Final allocations saw roughly 50% of the deal placed with the top seven accounts. About 80% of the institutional order book also went to long-only funds, with the bigger accounts given less than a 70% fill to encourage them to make secondary market top ups.
"This was never really going to attract hedge funds," another person familiar with the deal commented. "It's a value play and while many of this investor type liked the company's story, they flagged the small deal size. They will now watch how it trades in the secondary market before making a decision whether to buy or not."
There were also concerns about share price overhang from potential future divestments by Korean private equity investor Hahn & Co, which has reduced its stake from 50% to 30% pre greenshoe. Korean founder Kwak Joung-Hwan has been diluted from 50% to 45%.
However, the deal did manage to make some inroads with US investors. Typically, smaller Hong Kong IPO's do not include a 144a tranche, but Cowell decided to roadshow in the US because of Apple's strong following there. It ended up with an institutional distribution split of two thirds Asia and one third US.
The retail tranche, accounting for 10% of the deal, closed just under five times covered, which means no clawbacks have been triggered. There is also a 15% greenshoe comprised of secondary shares.
Cowell's IPO may not have had a particularly sparkling ride through the primary markets, but the lower level of retail participation combined with the anchoring effect of a few large accounts should help ensure a fairly smooth secondary market debut.
Cheap Apple proxy
At HK$4.25 per share it has been valued at 6.5 times forecast 2015 earnings, giving it a market capitalisation of HK$3.54 billion ($456 million). This makes it a very cheap proxy for Apple, which was trading at 14.72 times consensus forward earnings at Tuesday's close in New York.
Apple is up 14.7% year-to-date, continuing to be propelled ever higher thanks to strong iPhone 6 sales, particular in China, where sales were up 70% year-on-year during the fourth quarter.
The company beat analysts’ expectations for global shipments of 66 million to 70 million iPhones over the same period. During the quarter ended March 31, Apple reported that it is struggling to meet demand.
Cowell supplies camera modules, one of the key differentiating factors for mobile phone vendors in their bid to expand market share and lift prices. It has been an Apple supplier since 2009 and derives 77.7% of its revenue from the tech giant, with the remainder from Samsung and LG Electronics.
It hopes to generate future earnings by expanding its product portfolio for the group. Morgan Stanley forecasts that net profits will jump from an estimated $73.7 million in 2015 to $101 million in 2017.
Korean comps
Its operations are based on the Chinese mainland and this is the main reason why it chose to list in Hong Kong. It had formerly been listed on Korea's Kosdaq, but was taken private in 2011.
LG Innotek, Apple’s largest Asian supplier, is listed in Korea. Until Wednesday, the stock had been on an upswing, rising 18.42% since a recent low of W94,300 on February 10 to trade at 12.61 times 2015 earnings.
Samsung suppliers Partron and Samsung Electro-Mechanics (Semco) have also done well recently. Semco is up 42.79% to Wednesday's close and is trading at 35.46 times consensus forward earnings. Partron is up 19.79% since mid-February and is now bid at 10.31 times forward earnings.
Pre greenshoe, Cowell is issuing 25% of its enlarged share capital, with a split of 40% primary shares and 60% secondary shares. Proceeds from the primary shares are being used to finance capacity expansion.
