Demand for the placement tranche of the BNP Paribas Peregrine-led deal topped the 14 times mark, offering some proof that institutions are willing to participate in a market which has become renowned for being illiquid and subject to the whims of retail investors.
Priced over the weekend, the 163.9 million share transaction came in at the top end of its HK$1.05 to HK$1.15 indicative range, raising HK$188.49 million ($24.2 million). Equating to a price/earnings ratio of 14.13 times 2000 earnings, the issue represents a 25% stake and was already trading up to a grey market price of HK$1.25 by the end of Monday.
However, while institutional books closed 14 times oversubscribed, the retail book closed a lesser 6.5 times covered. "Market sentiment has just not picked up yet from retail investors," comments one syndicate banker. "2000 wasn't a good year for them in the tech sector and there is just not the money out there at the moment."
"Institutions, on the other hand," he adds, "want more of the company and have all indicated that they are in for the long run."
Institutions were allocated 80% of the deal, with roughly 60 % placed in Asia, 18% in Europe and 12% in the US. Alongside the lead, co-leads are Bank of China International and WI Carr, with co-managers comprising ABN Amro, DBS Securities and Ka Wah Capital.
Analysts attribute the deal's success to the management premium attached to a company which recorded 14 years of losses from 1985 to 1999, but turned around after the appointment of former Harvey's executive Richard Yeung as CEO.
The company operates 123 Circle K convenience stores in Hong Kong and is a subsidiary of the private investment holding arm of Li and Fung, one of Asia's largest trading groups. Yeung is credited with being able to cut costs in product sourcing, in the process netting the company HK$45 million in net income last year.
The deal also incorporates a China premium, reflecting the company's ambitious plans on the Mainland, where it is in the process of setting up a joint venture operation that will lead to the opening of 70 stores by the end of 2001. Currently, there are said to be 100 international brand convenience stores.
However, some analysts argue that with the Hong Kong market saturated and the China market only at a very early stage of development, it will take some years for real profits to shine through. Says HSBC analyst Anne Ling: "In Hong Kong, Circle K is up against 7/11, which has many more stores (400) and offers value-added services such as buying stamps and paying for bills with an Octopus card."
"And in China where the company is now planning to expand," she continues, "there is a very large population, but it is questionable whether the country is at a sufficiently advanced stage of development to support a lot more stores. Management have said that they are expecting a three-year payback in the PRC, so over the intermediate term, any profit gains in Hong Kong will be offset by losses in China."
Syndicate bankers, on the other hand, say that start-up losses are often to be expected. "Aside from the China angle, what investors really liked was the fact that Circle K is 100% owned by Convenience Retail. It is not a subsidiary franchise like 7/11 and it's management is regarded as being far more dynamic and organized."