The China-based provider of wireless coverage solutions, which help extend the reach of wireless networks to areas with weak or no coverage, priced the deal at HK$3.55 per share after marketing it to investors at HK$2.96 to HK$3.55. JPMorgan was the sole bookrunner.
Earlier yesterday China High Speed Transmission (CHST), which makes gearboxes for wind turbines, priced its offering at the maximum HK$7.08 per share for a total deal size of $272 million.
While the secondary markets in China and Hong Kong are currently very jittery, mixing record highs with sizeable slumps, the interest for primary issues out of China remains largely unaffected as indicated by the solid order amounts achieved by both deals. On the retail side, subscriptions were high enough to trigger a full clawback, forcing both Centron and CHST to allocate half their deals to retail investors.
This also suggests that the market is so far having no problems absorbing the large number of Hong Kong IPOs currently in the market. Another four Hong Kong listings above $100 million are due to price later this week, followed by three more next week, including a $1.5 billion primary offering from Chinese conglomerate Fosun International. In addition, China-based semiconductor manufacturer Spreadtrum was set to fix the price on its Nasdaq IPO early this morning (June 27) with sources saying there was a real chance it may end up above the indicated range thanks to very strong demand.
ôSome of the listed stuff is becoming quite expensive, which may be prompting investors to rotate their cash into the new listings that tend to come at a discount,ö one observer says.
This may have worked as a positive for Centron in particular, deeming from the share price development for one of its main competitors, Comba Telecom Systems Holdings, which is already listed in Hong Kong. Comba saw a significant drop in its share price during CentronÆs 1.5 week roadshow after it raised $46 million through a placement.
The placement initially caused some concern that CombaÆs management may be calling the top of the market and also narrowed CentronÆs relative discount to its competitor, but in the end, the stronger fundamentals and wider margins of the listing candidate lured investors back, according to a source familiar with the marketing.
Comba has higher revenues and ranks as the sector leader in China ahead of US-listed Grentech and Centron in terms of sales, but some investors were said to be a bit sceptical about the earnings projections for Comba going into next year. Consensus estimates put its earnings growth between 2007 and 2008 at 26%-27% compared with 17% for Centron, which suggests that CombaÆs price-to-earnings estimates for next year could be a bit too low.
According to Bloomberg data, Comba trades at a 2007 P/E of 13.5 times and a 2008 P/E of 10.2 times, the IPO price values Centron at a 2007 P/E of 12 times and a 2008 P/E of 10.4 times. For investors who regard the forward growth projections for Comba as too aggressive, this does make Centron look more attractive from a valuation point of view. Meanwhile, Grentech trades at a 2007 multiple of 25.8 and a 2008 multiple of 16.4.
There were no specific subscription numbers available for Centron, but a source says the retail tranche was well over 100 times covered û thus the full clawback û while about 60 or so institutional investors came into the book. The latter line-up included some investors who were existing or previous shareholders of Comba and therefore knew the sector well, but also a large number of accounts that were new to the sector.
Sources say the quality of the book picked up significantly during the final days of bookbuilding and while the majority of the orders came from Asia, the meetings in Boston and New York did turn out some good interest from emerging markets funds. The book also included a few high quality European names.
Centron sold 34% of the company, or 234 million shares of which 74% were new. There is also a 15% greenshoe, which may boost the total proceeds to $124 million.
A key buying point was the upcoming launch of 3G services in China, which is now expected to happen in 2008. This should create a lot of opportunities for Centron, which specialises in ensuring that mobile phones work in places like high-rise buildings, highways, railways and tunnels, as well as remote regions and complicated topographical areas like mountains, coastlines and grasslands.
Most of the companyÆs coverage solutions are supplied to ChinaÆs two leading wireless operators, China Mobile and China Unicom, which accounted for 51.2% and 38.4% of its sales last year.
Compared with Comba, which does most of its work in the cities, Centron is primarily active in the countryside and in ChinaÆs inland regions. As this is where most of the new mobile subscribers come from these days, the listing candidate should also see continued growth in its 2G revenues, which more than doubled last year to Rmb553 million ($71 million).
By operating in these more remote regions, Centron is also able to achieve better payment terms as the signing off on each project is a lot simpler and quicker than in the big cities where the operator may have to check a couple of dozen high-rise buildings before paying the supplier. Centron is, however, looking to expand into large coastal cities in the Mainland and to overseas markets in Australia, Southeast Asia and Africa to capture new sources of income.
Centron is also seen to be in a better position to benefit as China Mobile makes a shift towards ôcentralised procurementö since it both makes and installs its products. Comba on the other hand is a pure manufacturer, meaning the installations have to be done by someone else.
However, Centron is still highly dependent on capex spending of the mobile operators and a further delay of ChinaÆs 3G launch would have a negative impact on its earnings outlook. While they are wider than the industry average, CentronÆs gross margins are also under pressure from the fierce competition in the industry and have narrowed to 37% in 2006 from 44% in 2004. A syndicate research report forecasts that the gross profit margin will continue to fall in the coming two years.
Meanwhile, CHST sold 300 million new shares, or 25% of the company, at the top of its HK$5.38 to HK$7.08 price range. Morgan Stanley was the sole bookrunner. According to sources, the retail tranche was 692 times subscribed, while the institutional portion of the deal was 150 times covered post-clawback. The 15% greenshoe may increase the total deal size to $313 million.
The final price values the company at 21.7 times its projected 2008 earnings, which puts it at a significant premium to the Hong Kong-listed Chinese machinery manufacturers as well as the general power component makers. Both these groups trade at an average 2008 PE multiple of about 15.
Given that ChinaÆs installed wind power capacity is expected to increase at a compound annual growth rate of 46.4% between 2006 and 2011, CHST should be able to achieve much higher earnings growth than these two groups of companies, however. Thus the premium is warranted, observers say.
CHST also came at a slight premium to the renewable energy players which are valued at about 21 times 2008 earnings.
CHST is scheduled to start trading on July 4, with Centron following suit a day later.
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