A 2.42 billion share IPO for China Container Shipping was priced at the bottom end of its indicative range yesterday (Thursday) after struggling to get out of reverse gear for the whole of its marketing period. A total of HK$7.68 billion ($985 million) was raised after the deal was priced at HK$3.175, the bottom end of a HK$3.175 to HK$4.175 range.
Having set off with what appeared to be a flawed execution strategy, lead managers BNP Paribas Peregrine and Morgan Stanley eventually came good after leveraging all the different demand constituencies to maximum effect. The largest allocation went to corporate investors, which took 36.5% of the deal ($360 million), followed by institutions on 34% ($334.5 million), the Japanese Public Offer Without Listing 19.5% ($192 million) and Hong Kong retail 10% ($98.5 million).
This followed a much healthier than expected oversubscription rate of 52 times on the retail book, which prompted clawbacks from 5% to 10% of the total deal and two times on the institutional book. The POWL attracted demand of $800 million and was led by Nomura, with Daiwa SMBC as a selling agent.
Like many a difficult China privatization before it, China Shipping was buoyed by the willingness of a group of key Hong Kong corporates to lend their support. In this instance, there were about 10 corporate accounts. Three of them were publicly named in the prospectus - Hutchison Whampoa, which took $100 million, Cheung Kong, which took $50 million and Chow Tai Fook, which took $30 million.
A further seven corporates accounted for another $180 million and are believed to include Seaspan and a Henderson Land vehicle.
Retail investors are said to have liked the deal because it was well supported by the corporates and pays a reasonable dividend yield of about 4% based on a 25% pay-out ratio.
The institutional book is said to have encompassed just over 200 accounts, with a geographical split of about 35% US, 35% Europe and 30% Asia. However, specialists comment that it was extremely top heavy.
As one puts it, "Investors are incredibly skittish at the moment. They either all pile in or they don't. In this instance, there was never enough traction in Asia, where accounts just sat on the sidelines."
The deal is ultimately said to have worked because some of the biggest global funds based in Europe and the US thought the stock had incredible value relative to global comparables. "A number of accounts took a contrarian view about the shipping cycle and came in with very large orders," he adds.
Compared to global comparables, China Shipping appears to have a lot of upside. Global shipping and marine services groups such as P&O and Kuehne & Nagel are trading at respective P/E ratios of 33 and 20 times 2004 earnings.
By contrast, China Shipping was priced at 6.5 times based on a 2004 profit forecast of about $378 million and flotation of about 40% issued share capital.
The main problem the leads faced was Asia, where shipping stocks average 10 times 2004 earnings, but individual stocks are trading all over the place. Unfortunately for China Shipping, regional investors honed in on the two cheapest stocks - Hong Kong's Orient Overseas (OOIL), which is trading at about five to six times and Singapore's Neptune Orient Lines (NOL), which is trading at about five times.
Taiwanese shippers, on the other hand, span roughly 8 to 16 times and the Japanese shippers 11 to 16 times. Not surprisingly Japanese investors found China Shipping particularly attractive relative to their own local comps.
However, rather than start off with a low valuation, build momentum and then try to lift it higher as the book gathered speed, the company adopted the opposite approach and was forced to cut the valuation after demand failed to materialise. At the beginning of pre-marketing, three of the main syndicate banks had a fair valuation of over 12 times 2004 earnings, with only one bank (Morgan Stanley) pitching for below 10 times.
Alongside the two leads and POWL co-ordinator, was Credit Suisse First Boston as senior co-lead, plus ABN AMRO and CLSA as co-leads.
But the biggest hurdle towards generating moment was the lack of visibility over sector fundamentals. Since the cycle turned in autumn 2002, shipping stocks have performed extremely well, with OOIL returning 210% on a one-year basis.
At the beginning of the year, most analysts were predicting the cycle would not turn until late 2005. However, over the past two months, investors have become nervous about the potential for further upside and most stocks have stalled. All of China Shipping's comps are still trading pretty much where they were when the company began pre-marketing at the beginning of May.
Few agree whether the sector has run ahead of itself and will plateau for a few months before rising again, or whether it has already peaked. If the former proves to be correct, then China Shipping may provide investors with considerable upside over the course of secondary market trading.
China Shipping is the world's 10th largest container shipping company, but should jump to the number six ranking within the next three years since it has so much capacity coming on stream. This has led to a sharp spike in gearing (206% end 2003) and the company intends to use IPO proceeds to pay down debt.
During roadshows, the company argued that it placed orders for new ships ahead of most of its competitors and will be able to ramp up capacity while markets remain strong. The main question mark hanging over the industry is how quickly global capacity will come on stream and dampen freight rates.
China Shipping says capacity will increase by 119% over the next three years, hitting 276,000 TEU's by the end of 2004 and 350,000 by the end of 2005. At the same time, it predicts net profit will jump from $167 million in 2003 to $377 million in 2004.