The Hong Kong initial public offering market has continued to stir back to life in the aftermath of the UK’s Brexit vote with the launch of a HK$2.6 billion to HK$3.4 billion ($340 million to $433 million) IPO for China Logistic Property Holdings (CNLP).
The deal follows hard on the heels of the launch of a HK$1.35 billion to HK$1.7 billion IPO for property service provider Greentown on Tuesday and the pricing of a HK$7.79 billion flotation for Orient Securities (DFZQ) on Wednesday.
However, while the deal flow is back on track, a fully functioning IPO market is not, with Orient Securities demonstrating once again just how dependent companies have become on Chinese corporate investors to achieve their valuation targets.
Oriented towards Chinese corporates
Orient, which is listing under its Chinese name Dong Fang Zheng Quan (DFZQ), only managed to cross the finishing line due to a strong line-up of Chinese corporate investors in both the cornerstone and institutional tranche.
Syndicate bankers said there was very little institutional participation in the 957 million share deal (pre-greenshoe), which, nevertheless, closed about three times covered. They said the retail tranche closed roughly one times covered.
Final pricing was fixed at HK$8.15 per share, just in the bottom fifth of the indicative range, which spanned HK$7.85 to HK$9.35.
Based on the final price, the 10 cornerstones that participated have taken 47.5% of the deal pre-greenshoe, or $474 million.
In terms of valuation, DFZQ has priced at 0.98 times forward book value and 1.05 times historic book value. This represents a big discount to the company’s Shanghai-listed shares, which are averaging 2.6 times forward book.
Year-to-date, Orient’s Shanghai-listed shares are down 28.08% to Rmb16.75 on Wednesday, or 34.47% on a 12-month basis. The stock has also underperformed the Shanghai Composite Index, which is down 17.17% year-to-date and 26.27% on a 12-month basis.
DFZQ ranks as China's tenth largest brokerage by assets and has Citi as a joint-venture partner.
Prior to DFZQ, the most recent securities house to list in Hong Kong was Hengtai in October. It raised HK$1.536 billion at HK$3.92 per share and closed 5.4% below issue price at HK$3.71 on Wednesday.
At this level, it is trading at roughly 0.8 times forward book value. Similar to previous IPO’s Orient was stymied by Hong Kong’s listing rules governing price to book valuations.
It was always unlikely that investors would accept pricing above book value when bigger brokers such as Galaxy Securities are trading around 0.9 times forward book and big beasts such as Citic, Huatai and Haitong are at 1.1 times.
Investors will have also held back because of a bulging pipeline, including prospective $2.5 billion deals for China Everbright Securities and China Merchants Securities, as well as smaller offerings for China Securities and Guoyuan Securities.
Trading for DFZQ will begin on July 8.
Godown valuation for CNLP
Cornerstones are set to take an even larger slug of premium warehouse operator CNLP’s 1.0357 billion new share IPO, which opened its books on Wednesday.
A group of four have agreed to purchase 47.3% to 60.2% of the deal pre-greenshoe.
Joy Orient Investment, owned by Sino-Ocean Group, will take $110 million, while LRC Belt & Road Investment Co will purchase $20 million, China Fintech Investment Company $20 million and Anbang Investment $55 million.
The deal is being marketed on a price range of HK$2.55 to HK$3.25 per share, equating to 33.9% to 35.9% of the company’s enlarged share capital pre-greenshoe.
The transaction is being marketed on a fairly hefty discount to net asset value (NAV) of 51.4% to 59.5% on a 2016 basis pre-greenshoe and 50.2% to 58.6% post greenshoe.
The closest comparable is Singapore-listed Global Logistics Properties (GLP), which is currently trading on a 36.7% discount to forward NAV, according to one broker’s valuation.
GLP has not had a good 2016, having traded down 17.21% year-to-date, compared to a 3.21% fall in the Straits Times Index, and is down 27.31% on a 12-month basis.
However, the majority of brokers rate the company a buy on expectations of asset transfers to an income fund.
GLP has a wider geographical remit than CNLP, with assets in Japan, Brazil and the US. Its Chinese portfolio is also on a completely different scale, with 12.8 million square metres of completed gross floor area (GFA) compared to Australia’s Goodman Group’s 1.9 million and CNLP’s 0.9 million.
GLP also has 5.7 million sqm of GFA under development through to the end of 2016, compared to Goodman Group’s 0.7 million sqm and CNLP’s 1.125 million sqm. This gives GLP an overall 58.6% market share in China’s premium logistics sector, with Goodman second on 8.2% and CNLP third on 6.6%.
GLP is also more concentrated in tier 1 cities and on a recent management conference call it said tier 2 cities were still showing signs of oversupply.
Most of CNLP’s pipeline is in tier 2 and tier 3 cities. In its prospectus it says it plans to add 4.5 million sqm between 2017 and 2019 in Shanghai, Kunshan, Foshan, Chongqing, Changsha and Xi’an.
Analysts DTZ Cushman & Wakefield say China’s overall GFA should expand by a compound annual growth rate of 9.8% between 2016 and 2020, compared to 20.3% between 2010 and 2015.
However, while occupancy rates have been slipping they have still held up well. GLP’s China portfolio averaged 87% at the end of the financial year compared to CNLP’s 89.3% rate.
The latter’s five largest clients account for 54.35% of the total, with JD.com holding the number one spot on 20.2%. Some 23.3% of leases will be renewed over the coming year.
CNLP will use 46.1% of proceeds to pay down debt and 43.4% to redeem convertible preference shares held by Carlyle Group.
The US private equity group participated in a pre-IPO fundraising round in June 2015, investing $200 million in tandem with RRJ Capital’s roughly $50 million. The latter also invested $225 million a year earlier in tandem with Temasek offshoot Seatown Holdings, which ploughed in $20 million.
Pre-IPO, the company’s founder Li Shifa and his wife owned 40.84%, with RRJ Capital on 29.48%, Seatown 4.75% and Carlyle 16.72%.
The IPO has the standard 90% and 10% split between institutional and retail investors. If the offering is between 15 and 30 times oversubscribed the retail offering will rise to 30%.
The retail offering will run from June 29 to July 7, with pricing set for July 8 and listing July 15.
Joint sponsors for China Logistcs Property are Credit Suisse and Deutsche Bank, with ABC International, CIMB, CMB International, China Merchants Securities, Haitong and ICBC as joint bookrunners and joint lead managers. Bank of America Merrill Lynch and AMTD are also joint lead managers.
Joint sponsors for DFZQ's IPO were Citi, Goldman Sachs and Nomura, with BoCom International as joint global co-ordinator.