Coming at a time when institutional investors are generally winding down their businesses for the year, the deal also faced a shrinking pool of prospective buyers, but sole bookrunner UBS was able to convince enough investors to hear the management out and to ensure that it was fully covered.
The bank was unable to do much about the price sensitivity though and the final price was fixed at the bottom of the HK$10.75 to HK$14 marketing range for a total deal size of HK$5.91 billion ($758 million). The company, which denies any wrongdoing with regard to the alleged use of confidential information, had been hoping to raise up to $987 million, based on the top end of the price range.
BYD Electronic is a spin-off from Hong Kong-listed BYD Group, which makes rechargeable batteries for handsets, handset components and cars. About 9% of the company is owned by a group of key employees, however.
While institutional investors could be persuaded to have another look at the offering, retail investors were seemingly not too impressed by the accusations from rival Foxconn International, which include two lawsuits, and according to one source close to the deal, the 10% retail tranche was only 0.4 times covered. It has been a while since the retail portion of a Hong Kong IPO wasnÆt fully subscribed, but recent new listings have shown a steadily declining interest from retail accounts for everything but a couple of deals. The two exceptions are China Railway Group and China National Materials Co (Sinoma), which are both linked to the booming construction sector.
Since BYDÆs institutional portion, which made up 81.1% of the total, was more than three times covered there was enough demand overall to take up the excess retail shares, however. The IPO also included a reserved share offer for existing shareholders of BYD Group, which made up 8.9% of the total deal.
BYD Electronic launched the deal with only one cornerstone investor in the bag, which in hindsight does seem bit optimistic on a deal approaching $1 billion û particularly given the volatile market environment, the close proximity of year end and the ongoing legal issues. Following the increased efforts by UBS, the $20 million investment commitment by the cornerstone investor (who was identified as Lau Luen-hung, chairman and chief executive officer of property development and investment company Chinese Estates Holding) was supplemented by a few anchor investors who bought between $300 million and $400 million of the deal, sources say.
The anchors, who contrary to the cornerstone investor arenÆt subject to any lock-up on their shares, were said to have welcomed the opportunity to buy a sizeable stake in a company that analysts deem to have high-growth potential. Because of the small portion of the deal going to retail investors, one can also expected there to be less selling pressure in the first few trading days, which is something that is generally appreciated by institutional investors. And despite the hesitant start to the roadshow, the source says the quality of the final order book was very high.
Observers say Taiwan-based Foxconn created a bit of headwind for the IPO by actively seeking out potential BYD investors to inform them about the ongoing legal dispute. Foxconn, which is a global leader within handset keypads and the assembly of handset modules, was also quoted by local media last week saying it had received information from an ongoing investigation related to its lawsuit in Shenzhen, which would suggest it is correct in its claims against BYD.
The dispute dates back to 2005 when a number of senior Foxconn employees left the company to join BYD. According to Foxconn, the employees took with them documents containing confidential information that BYD has since used to make forays into its turf. The company currently has one outstanding lawsuit against BYD in Shenzhen and one in Hong Kong where it is also seeking damages for losses suffered. Neither court has made a ruling yet and BYD says in its listing prospectus that it hasnÆt set aside any reserves to cover these litigations.
The company offered 25% of the enlarged share capital in the form of 550 million shares. Sixty percent consisted of new shares, while the remaining 40% were existing shares sold by the parent company. There is a 15% greenshoe of all new shares that could boost the total proceeds to $872 million.
At present, just over three quarters of the companyÆs revenues (76.9% in the first half 2007) comes from the manufacturing and sale of plastic casings and keypads, while the rest is generated by the assembly of mobile phone modules for Motorola û a business that the company moved into just over a year ago.
Syndicate analysts project that this new business will be a key contributor to revenues growth in the coming years, however, as it is expected that Nokia too will start to use BYDÆs assembly services in the interest of getting a more balanced handset supply-chain and avoid relying too heavily on one dominating player (Foxconn). Nokia is currently the companyÆs largest customer for casings and keypads and accounted for 76% to total revenues in the first half of this year.
At the same time, BYD is expected to be able to leverage its new assembly relationship with Motorola to also include the sale of casings and keypads. Another potential source of revenue growth is the companyÆs expected move into the manufacturing of metallic casings and components. Analysts believe that its parent company's good relationships with the mobile handset brands through its battery business will be beneficial to BYD as it expands its own business.
One syndicate research report forecasts revenues to increase at a compound annual growth rate of 182% in 2007-2009 to reach Rmb18.5 billion ($2.5 billion) at the end of this period from Rmb3.0 billion in 2006. Net profit is expected to grow by 44%-46% to around Rmb1.06 billion ($144 million) and by a further 57%-67% in 2008, based on the projections by analysts at two different syndicate banks.
While BYD is coming from a lower base and therefore should be able to grow at a faster pace than Foxconn, some investors may not have felt that the discount to its larger rival was large enough and with FoxconnÆs share price coming down slightly during BYDÆs roadshow the gap did tighten even further. Based on the IPO price, BYD is valued at 13.6 times its projected 2008 earnings which compares to 15 times for Foxconn at the time of pricing and results in a 9.3% discount.
Meanwhile, the share price of BYD Group slid close to 18% during BYD ElectronicÆs roadshow, which saw its 2008 price-earnings ratio drop to 12.4 times from 15.1 times at the launch. As a result, some investors may also prefer to get exposure to the newcomer indirectly through the parent at a cheaper price.
BYD is due to start trading on December 20.