China Resources Pharmaceutical Group raised HK$14 billion ($1.8 billion) from Hong Kong’s second biggest initial public offering this year, pricing the share sale near the bottom end of the guidance before trading opened on Friday.
The Chinese pharmaceutical firm, also known as CR Pharma, managed to pull together a final order book of about two times the deal size across both institutional and retail tranche, according to bankers. There was no clawback for the retail tranche, so the original split remained, with institutional investors getting 95% and retail accounts 5%.
Most of the deal was allocated to Chinese institutions and Asian funds, but a number of US pharmaceutical-focused funds also participated on the scale of the offering, said bankers close to the transaction.
Final pricing for the 1.54 billion-share offering was settled at HK$9.1 per share, the bottom end of the HK$9.1 to HK$9.6 revised price range. It was also in the lower half of the initial price range of HK8.45 to HK$10.15, suggesting that investors showed strong price sensitivity towards the deal.
Such price sensitivity was somewhat expected during the course of the bookbuild since two of its closest comparables, namely Fosun Pharma and Shanghai Pharma, have both dropped 3% since CR Pharma began bookbuilding in mid-October.
Since market valuations of the two companies were already in line with CR Pharma’s valuation at the bottom of the price range, the decline in their share price further limited the room for CR Pharma to price high in the absence of investors that are willing to pay a significant premium.
On a pre-shoe basis CR Pharma is valued at around $7.2 billion, or 15.4 times earnings next year based on syndicate consensus estimates. That implies a 6% premium to Fosun Pharma, which trades at 14.4 times, and a 13% premium to Shanghai Pharma trading at 13.3 times.
But some investors argue it makes sense to value CR Pharma at a premium because it has an integrated business model that combines both drug manufacturing and distribution. Fosun Pharma and Shanghai Pharma are largely upstream drug manufacturers, meaning their revenue tends to fluctuate on their research and development progress and the speed of drug development.
CR Pharma claims to be China’s second largest both in terms of drug manufacturing capability and distribution network, according to the company’s IPO marketing materials.
Syndicate bankers said they have benchmarked CR Pharma against larger comps such as Sinopharm, which is also a state-owned enterprise that possesses both drug making and distribution capabilities. The comparison could suggest some upside to CR Pharma investors because Sinopharm is trading at about 17.3 times 2017 earnings, or about 10% richer than CR Pharma.
The company could also enjoy potential upside from an asset injection from its parent in the future since it has yet to consolidate the group’s stake in Australian cancer therapy provider Genesis Care. The Australian firm said in July that China Resources Group and Macquarie have entered into agreements to buy up to a 74% stake in the company.
In any case, CR Pharma’s trading debut on October 28 will be highly-anticipated since it is the second largest IPO in Hong Kong this year after Postal Savings Bank of China’s mammoth $7.4 billion listing in September.
The listing of CR Pharma marks yet another privatization of China Resources’ mainstream business, being the sixth listed company directly under China Resources Group.
Other Hong Kong-listed subsidiaries of China Resources Group are CR Beer, CR Power, CR Land, CR Cement and CR Gas.