Bawang prices IPO at top, raising $215 million

Frantic retail demand for a piece of the shampoo maker triggers a clawback that increases the Hong Kong public offer to 50% of the deal.

Strong institutional orders and frantic retail demand enabled herbal shampoo maker Bawang International to price its initial public offering at the top of the range and to raise HK$1.6 billion ($215 million) ahead of its listing on July 3. 
The 700 million shares on offer were priced at HK$2.38 each, the top of an indicative price range of between HK$1.95 and HK$2.38. If the 15% greenshoe is exercised in full, a further 105 million shares could be injected into the deal, bringing the maximum possible deal size to $247 million.
Retail demand was so strong -- the Hong Kong public offer was over 400 times covered -- that it triggered a clawback which increased the 10% that was initially earmarked for retail investors to 50%. Tying up $8.6 billion of cash, this is the strongest retail showing in a Hong Kong IPO so far this year in terms of subscription ratios, and well beyond the coverage levels of other IPOs of a similar size that have proved popular with retail investors. The February IPO for Real Gold Mining was 68 times covered, while China Metal Recycling's IPO earlier this month was around 44 times covered. 
Although most of Bawang's sales are in mainland China, it is a well-known shampoo brand in Hong Kong, which will have stoked some of the retail interest. Over the past few weeks, television adverts have plugged the company, reinforcing awareness of the deal. But to fully explain the success of the company with retail investors, it is important to also consider that consumption stocks are usually popular with individual investors and that there is the attractive backdrop of strong markets, said one source close to the deal.
Institutional demand was enough to cover the pre-clawback book 40 times. The majority of the demand came from Asia, with some participation from European and US investors. Investors were described as predominately long-only funds, with several orders from some of the largest global asset managers.
The final price values Bawang at 17.5 times predicted earnings for 2009. Since there are no other shampoo companies listed in Hong Kong, investors compared it to companies such as Hengan International, China's leading personal hygiene company, which is currently trading at 24 times predicted earnings for 2009, according to Bloomberg.
Bawang produces China's most popular herbal shampoo brand. Compared to conventional shampoos, it is the fourth most popular, behind three brands owned by Proctor and Gamble. Its target market is primarily middle-aged men who might benefit from its hair restoration or anti-dandruff products.
The company intends to use approximately 30% of the money raised for brand promotion. Some of this will be used to pay for celebrity endorsement. The company already uses actor Jackie Chan in its advertising and is expected to bring in canto-pop singer Faye Wong for its upcoming range of products for women. The research and development for these new products will take up 20% of the cash. Just under 20% will be used to expand its distribution network in China and develop markets such as Taiwan. Another 12% will go towards expanding production facilities, while the remainder will be used as working capital and money kept aside for potential acquisitions.
The Bawang deal priced a few days after 361 Degrees International, a Chinese manufacturer and distributor of sportswear, completed its IPO. Unlike Bawang, 361 priced its deal just below the mid-point of its indicative range, at the symbolic price of HK$3.61 per share. The two IPOs show that interest in the China consumption story has not waned. Whether or not the interest is justified will be seen this week when both stocks start trading.
HSBC and Morgan Stanley were joint bookrunners on Bawang's IPO, while 361 employed Merrill Lynch as the sole bookrunner for its offering.

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