The provider of online education and test preparation courses had initially hoped to raise up to $97.25 million, or 59% more than it was finally able to pocket. Deeming from the first trading session on the New York Stock Exchange last night though, some investors think the fair value of CDEL should be a bit lower still as the share price was pushed down another 5.3% to $6.63 a share, having traded as low as $6.25 at one point.
While the education sector is generally viewed as having good future prospects, the deal was up against a widespread lack of interest in primary market transactions which didnÆt really change even though the market trended upwards during the two-week marketing period û as did two of its closest comparables. One source notes that there is still ôa significant disconnectö between the secondary market and investor appetite for stock in the primary market. And it clearly didnÆt help that GT Solar, a manufacturer of equipment used to make photovoltaic wafers, fell 11.6% on its trading debut last Thursday and is currently trading close to 25% below its IPO price.
However, sources say CDELÆs initial price range may also have been a bit too ambitious in the current market as it valued the newcomer at a premium to the valuation at which ATA Inc came to market six months ago, even though CDEL is at a similar, or even earlier, stage of growth than ATA and has yet to prove that it can deliver on its promises. ATA is also based in China and caters to the same market as CDEL but, instead of pre-exam preparation services, it provides online exams û a business that observers describe as less scalable.
CDEL focuses primarily on professionals and the skills, licenses and certificates that they need to pursue a career in China within accounting, law, healthcare, construction engineering, and information technology among other industries. The Beijing-based company also offers online preparation courses for higher education diplomas and degrees, and for academic and entrance exams at the secondary school and college level; and foreign language courses. The business is feeding off a government push to regulate professional licenses in various industries in order to lift the overall skill levels.
According to Chinese market research firm CCID Consulting, the professional education and test preparation market in China grew to Rmb75.0 billion in ($10.7 billion) in 2007 from Rmb45.2 billion in 2005 and CCID projects that it will more than double to $155 billion by 2010.
After lowering the initial $9 to $11 price range to $7 to $8, CDEL fixed its IPO price at $7, which translates into a valuation of about 15 times its earnings to September 2009 on a post share-based compensation basis. On a pre-share-based compensation basis, the price-to-earnings multiple is about 15 times which, according to a source, compares with P/E multiples of 31.9 and 20.5 for New Oriental Education and Technology Group and ATA respectively, when adjusted to refer to the same 12-month period to September 2009. New Oriental, which also provides test preparation services and teaches English to Chinese professionals, has a fiscal year ending in May, while ATAÆs fiscal year ends in March, making its unadjusted numbers not quite comparable.
New OrientalÆs share price gained 8.8% during the marketing and bookbuilding of CDEL and ATA added 25%.
CDEL sold 24.7% of its share capital in the form on 8.75 million new ADS, which each accounts for four common shares. A greenshoe could increase the size of the offering by another 15% to $70.4 million. Citi and Merrill Lynch were joint bookrunners.
The money will be used for working capital and capital expenditure related to the expansion of its business and potential acquisitions.
At the final price, the deal was a bit over 1.5 times covered and attracted just under 30 investors. As usual for US deals, the majority of the demand came from various US-based accounts, including small-cap funds, growth funds focusing on China, some specialist education funds and some hedge funds. Less than 15% of the demand came from Asia and a similar amount from Europe.
One source says there was interest at around the $7.50 level, but the fact that the price range was lowered through a new filing with the US regulators suggests that the bulk of the orders were placed at $7. Since US IPOs can be priced 20% above or below the original price range, the bookrunners could have fixed the price at $7.20 even if they had retained the initial range.
CDEL has grown rapidly in recent years, but is still quite small with revenues of only $11.8 million in fiscal 2007. Net profit rose from $300,000 in fiscal 2005 to $5.4 million in fiscal 2007, and analysts expect it to continue to grow strongly in the coming few years as the company introduces new products and courses.
The outcome may not look too encouraging for other Chinese companies hoping to do an IPO in the US. Earlier this week, GCL Silicon, which makes polysilicon for the use in solar wafers, also decided not to launch a formal roadshow and bookbuilding for its planned IPO of up to $862.5 million at this time. Separate sources say factors like GT SolarÆs poor debut, a lower-than-expected earnings report by MEMC Electronic a day earlier - which resulted in a negative sentiment for solar power plays in general - and the current thin appetite for IPOs all played a role in the decision. MEMC is a supplier of silicon wafers to the chip and solar industry.
GCL Silicon, which started investor education on July 21 with a hope of launching the deal late last week or early this week, will now likely not come until early September. Credit Suisse and Morgan Stanley are joint bookrunners.
On the other hand, some observers note that CDEL shows it is possible to get a deal done, if you offer enough of a discount versus the sector peers. On that basis, China Mass Media International Advertising, which is also currently in the market, should be able to pull through, they say. The Beijing-based TV advertising agent is seeking to raise between $75 million and $104 million with the help of sole bookrunner Merrill Lynch. The deal is set to price after the New York close tonight.
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