Alibaba prices world's second largest tech IPO

The $1.5 billion deal prices at the top, attracting more than 1,200 institutional investors and a record amount of retail dollars., the provider of ChinaÆs leading online trading platform, had no problem pricing its initial public offering at the top end of the range. Sources say the deal attracted a massive following of more than 1,200 institutional accounts from across the globe.

The final price of HK$13.50 will see the company raise HK$11.6 billion ($1.5 billion), making it the largest technology sector IPO in Hong Kong ever and the second largest globally after GoogleÆs $1.67 billion offering in 2004.

Founded by Chinese Internet personality Jack Ma, Alibaba has evolved into a genuine global franchise and the leading online market place for connecting Chinese manufacturers and international importers, which explains its popularity with investors. And contrary to most other Chinese technology or internet companies that are primarily linked to the China consumption story, Alibaba is connected with international trade and therefore is a more direct play on ChinaÆs economic growth.

ôItÆs a unique business model, but one that isnÆt difficult to understand. It also has a very powerful brand,ö one source says. ôThis isnÆt one of these companies that can be described as æChinaÆs GoogleÆ or ChinaÆs version of some other global company. This is a global leader in its own right and everybody who is invested in Google or ebay were also looking at this deal,ö he adds.

ôThis deal is truly a global phenomenon as seen by the fact that it attracted investors based anywhere from Japan to Brazil,ö adds another source.

Hong Kong retail investors were no exception. In fact, the Hong Kong public offering drew more subscriptions in dollar terms than any other Hong Kong IPO, surpassing shoe manufacturer and retailer Belle International which was previously the most popular deal among Hong Kong retail investors with a total order amount of HK$446.7 billion. AlibabaÆs retail tranche, which initially accounted for 15% of the total deal, drew HK$452 billion worth of orders, sources say. This translated into an oversubscription ratio of 258 times and triggered a full clawback that increased the size of the retail tranche to the maximum 25%.

After adjusting for this and subtracting the $275 million cornerstone tranche, the remaining institutional tranche was about 191 times covered, sources say. In absolute dollar terms, this comes to about $162 billion of demand, which is below the $300 billion committed for Industrial and Commercial Bank of ChinaÆs $13.9 billion H-share offering, but exceeds the institutional demand for Bank of ChinaÆs $9.2 billion offering and China Construction BankÆs $8 billion deal, despite their much larger sizes.

AlibabaÆs order book of more than 1,200 institutional accounts is also believed to be unprecedented even on a global scale, sources say. However, this number does include Hong Kong tycoons and corporates as well as private banking clients.

In terms of order amounts, Asia accounted for about 60%, Europe for 25% and the US for 15%, although this was somewhat skewed by the corporate and private banking investors who inflated the order amount from Asia. In terms of number of investors, the US participation was quite high, the sources say.

The cornerstones included US search engine provider Yahoo!, which bought $100 million worth of shares. This will give it an approximate 1% stake in the company assuming the over-allotment option is exercised in full. Yahoo! is also already an investor in Alibaba.comÆs unlisted parent company Alibaba Group, holding just under 40%.

Another seven investors also received pre-agreed allocations in return for a 24-month lock-up. Unusually for a Hong Kong IPO though, their share of the deal was clawed back in line with the total institutional tranche, reducing their combined allocation to $175 million from $200 million and the total cornerstone tranche to $275 million from $300 million.

The cornerstones comprised: US-based Cisco Systems; Foxconn Far East, which is a wholly owned unit of TaiwanÆs Hon Hai Precision; investment firm AIG Global; ICBC (Asia), which is the Hong Kong arm of Industrial and Commercial Bank of China; and the families behind the Wharf Group, the Kerry Group and Sun Hung Kai Properties.

Alibaba sold 858.9 million shares of which 26.5% were new. The rest was sold by Alibaba Group, allowing it to monetise part of its investment and raise cash for other parts of its business. The deal includes a 15% greenshoe that could boost the total deal size to $1.7 billion. Including the shoe, the free-float will be 17.6%.

Deutsche Bank, Goldman Sachs and Morgan Stanley were joint bookrunners for the IPO.

The shares were offered in a range between HK$12 and HK$13.50 after the range was increased from an initial HK$10 to HK$12 a few days into the roadshow when the extent of the demand was started to become clear.

The final price of HK$13.50 values Alibaba at 53.8 times its projected 2008 earnings, based on the syndicate consensus before stock-based compensations, which marks the highest IPO multiple for a Hong Kong IPO ever. The valuation represents a discount of about 36% versus Chinese search engine provider which trades on Nasdaq and is quoted at a 2008 P/E multiple in the mid-80s, but some investors argued during the roadshow that the valuation was still looking a bit rich. However, the size of the demand suggests that enough investors see value at these levels.

In fact, the IPO has resulted in a move up of valuations for the entire sector. Hong Kong-listed Tencent, which is the provider of an online social networking site, now trades at about 58 times 2008 earnings, compared with 46 times at the start of AlibabaÆs roadshow on October 15.

The willingness of investors to pay a high valuation is linked to a belief that Alibaba will be able to continue to tap into the massive market opportunity offered by ChinaÆs 42 million small and medium enterprises. At present, the company has merely scratched the surface of this pool of potential future revenues with its 260,000 or so paying customers.

Also, it likely didnÆt hurt that the final four days of the roadshow (and the entire retail offering) coincided with a 7.2% rally in the Hang Seng Index. This took the HSI to a new record close of 30,405 points on Friday and a 52% gain year to date.

Alibaba will start trading on November 6.
¬ Haymarket Media Limited. All rights reserved.
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