CR Pharma IPO fuels expansion plans

China's second-largest drug manufacturer to raise funds for expansion amid industry consolidation.

China Resources Pharmaceutical Group (CR Pharma) has launched its Hong Kong initial public offering. The transaction has been eagerly awaited by investors because of its size and analyst expectations that the listed stock should perform better than other recent IPOs.

On Thursday the pharmaceutical arm of China Resources Holdings started bookbuilding for the transaction, which could raise as much as $1.57 billion ($2 billion) pre-greenshoe and $2.32 billion post-greenshoe.

Other billion-dollar IPOs in Hong Kong this year have not fared well. Postal Savings Bank of ChinaChina Zheshang Bank and BOC Aviation have largely underperformed the broader market since listing their shares earlier this year.

However, CR Pharma's share sale comes at a time when most Hong Kong-listed pharmaceutical companies' stocks have been trading higher over the course of the year. Market leaders such as Sinopharm Group, Shanghai Fosun Pharmaceutical Group and Shanghai Pharmaceuticals have gained 23%, 10% and 27.5% respectively since January.

According to the company’s prospectus, it will spend 45% of the IPO process for strategic acquisitions and to expand its manufacturing and distribution businesses. Investors tell FinanceAsia the company, China's second-largest drug manufacturer, can use that scale to its advantage.

That is partly thanks to recent reforms designed to curb prices and improve the quality and accessibility of drugs, which is burdening smaller competitors with new costs and barriers that will force many of them to exit the market.

In December, China’s Food and Drug Administration published guidelines to shake up how drugs are priced, introducing competitive tenders among hospitals in place of regulated set prices. The FDA also streamlined the process for approving new drugs.

The measures initially prompted concerns about the future profitability of pharmaceutical companies, hurting share prices across the sector in the first quarter of 2016. But after the bigger players posted better-than-expected results over the summer, their share prices have rallied.

Analysts now say the measures will support the biggest players in the industry, which can absorb lower prices and sustain investment into research and development. They are also expected to acquire smaller players that will struggle to compete under the new, market-friendly pricing environment.

Comparables

CR Pharma’s IPO comprises 1.54 billion new shares, equivalent to 25% of the firm’s enlarged share capital, and a standard 15% greenshoe option. 

The shares are being offered at an indicative price range of HK$8.45 to HK$10.15 per share, suggesting that the deal is being pitched on a consensus forecast of 14.7 to 17.7 times earnings next year on a pre-greenshoe basis, and 15.3 to 18.3 times post-greenshoe.

Some syndicate analysts suggest Sinopharm as the closest comparable, given its state-owned status and its leading position in the pharmaceutical industry. CR Pharma’s valuation is fairly conservative compared to Sinopharm's, which is trading at 20.5 times historical P/E and 17.3 times on a forward basis.

However, most of Sinopharm’s revenue comes from drug sales and distribution, while CR Pharma’s is from drug manufacturing. In this regard it is more like upstream players such as Fosun Pharma and Shanghai Pharma, say fund managers.

Fosun is trading at 14.9 times forward earnings while Shanghai Pharma trades at 13.7 times. That is in line with the bottom end of CR Pharma’s valuation range.

Will investors pay a premium to buy CR Pharma's IPO? The company boasts a stronger distribution network to its upstream peers. The company says it sells more than 34,000 types of products to 37,000 primary medical institutions. It describes some of its brands as premium, including CR Care, Yibaoquanxin and Tung Tak Tong.

It is also the controlling shareholder of three mainland-listed pharmaceutical companies: China Resources Sanjiu Medical and Pharmaceutical, China Resources Double Crane Pharmaceutical, and Dong-E-E-Jiao.

Details

Similar to other IPOs of Chinese state-owned enterprises in recent years, CR Pharma has pre-sold $916 million worth of shares – or 46% to 54% of the deal depending on final pricing – to eight cornerstone investors.

But unlike most of the other SOEs with an all-Chinese lineup, CR Pharma managed to secure three foreign investors as well, which are taking up $256 million worth of shares. They are Japan’s Fujifilm ($106 million), Sweden’s Nordea Investment ($90 million) and London International Trading ($50 million).

The other cornerstone investors are Hengjian International ($340 million), China Life Insurance ($200 million), China Chengtong Holdings ($50 million), Anbang Investment ($50 million) and High Action ($30 million), an entity controlled by Hong Kong tycoon Thomas Lau.

Under the current timetable, the IPO will be opened for institutional subscription until October 20, while trading is set for October 28.

Bank of America Merrill Lynch, CCB International, CICC and Goldman Sachs are joint sponsors of the IPO.

Morgan Stanley, ABC International, BOC International, CMB International, China Merchants Securities, HSBC, ICBC International, JP Morgan and Mizuho are joint bookrunners.

¬ Haymarket Media Limited. All rights reserved.