China South City Holdings yesterday raised $406 million ahead of its listing on September 30. The developer and operator of a Shenzhen logistics and industrial trade centre is a well-known company in China and this helped to fill the book with orders from local investors.
The deal priced at HK$2.10 a share, the top of an indicative range that went as low as HK$1.40. The 1.5 billion shares on offer represent 25% of the company, and if a 15% greenshoe is fully exercised, the total deal size could be as high as $467 million.
One source said that the book was multiple times covered, with more than 50 institutional orders. Demand was described as being heavily weighted towards Asia, specifically Chinese and China-in-Hong Kong accounts. Long-only funds, hedge funds and private banking money all participated.
The high level of interest from Chinese investors can be attributed to two factors. First, the company is well known in southern China, which means investors from that area are already aware of its business model. Second, the company runs a venue where buyers and sellers meet, meaning that it has many business-to-business relationships and this attracted a large contingent of corporate investors.
The Hong Kong public offer was 35 times covered, enough to trigger a clawback that increased the portion of the deal allocated for retail investors to 30% from the original 10%.
Investors were valuing the company primarily on a discount to net asset value (NAV) basis . Based on the IPO price, the discount to NAV is 51.8% pre-shoe and 50.8% post-shoe.
This is reasonable compared to two other Chinese companies currently undergoing IPOs. Glorious Property Holdings, which launched its roadshow last week, is seeking to raise as much as $1.5 billion at a discount to NAV of between 34% and 47.5%. Another listing candidate, Powerlong Real Estate Holdings, which is probably a better comparison because of its exposure to commercial property, is looking to raise up to $632 million by offering shares at a 22.4% to 44.8% discount to NAV.
It is worth pointing out, however, that the estimated net asset value that China South City's discount is based upon (HK$26.6 billion), only takes into account pre-existing projects. When other projects start to come online, the NAV could increase significantly. Also, one should be careful when comparing China South City to a more conventional property developer, since its business focus is quite unique on the Hong Kong market.
The company will use the proceeds for four purposes. Approximately one-quarter of the money will be spent on the development of the second stage of its Shenzhen trade centre; half will be used to develop projects in Nanchang and Nanning; and the remainder will be used to pay some debt and as general working capital.
Bank of America Merrill Lynch and Bank of China International were the bookrunners on the deal.
In other equities news, Sinopharm Group made its trading debut yesterday. The highly popular IPO closed 15.75% above its IPO price, which suggests that despite the high number of new IPOs competing for attention in Hong Kong, there is enough interest in the secondary market to allow IPOs to trade up on their first day.
