Drug maker and PCB manufacturer launch first HK IPOs for 2007

Hong Kong companies Wuyi Pharmaceutical and Meadville seek to raise a combined $265 million with trading debuts scheduled for the first two days of February.
Meadville Technologies and Wuyi Pharmaceutical yesterday kicked off the institutional roadshows for their respective initial public offerings, marking the first two IPOs to hit the Hong Kong market this year.

Aiming to raise up to $265 million between them, the deals are still relatively small, but will offer the first real test of whether the investor enthusiasm for IPOs has carried over to the new year. Copper and magnet wire producer Tai-I International, whose $32 million IPO was launched in December but completed and priced in early January, said the retail portion of its offer was more than 100 times covered while the institutional tranche was ôsignificantly oversubscribed,ö suggesting that demand probably remains intact.

ôRetail investors are still making money from the IPOs so there is no reason why they wouldnÆt continue to buy into these deals,ö says one observer.

The Hang Seng Index has seen a modest correction since it closed at an all time high of 20,413 points on January 3, but has resumed the upward trend over the past four sessions. Yesterday it added 0.18% to 20,064 points.

According to brokers, retail investors are expected to be more interested in Meadville, which has the added attraction of being owned by the family of Hong KongÆs financial secretary, Henry Tang. The company, which makes printed circuit boards for high-end products, is also bringing the larger of the two deals at up to $162 million which should appeal to institutional investors. Citigroup and HSBC are joint bookrunners for that offering.

However, both companies operate in competitive industries, which could dampen the interest somewhat. Wuyi Pharmaceutical, which makes modern Chinese medicines as well as Western prescription and over-the-counter drugs, is marketed as a high-growth stock but the sector is also highly regulated and has low barriers to entry, especially on the Chinese medicine side. The IPO will be arranged by Credit Suisse and UBS.

Meadville, like other PCB manufacturers, is faced with price reductions and declining market share as a result of cut-throat competition, but syndicate analysts argue that the companyÆs focus on the high-end of the market and the fact that it services a broad range of industries, including computers, cell phones, communications equipment and (to a lesser degree) consumer electronics, gives it an edge over its competitors. Among other things, the company is expected to land significant orders related to the roll-out of 3G services in China as telecom equipment manufacturers Huawei and ZTE are already among its customers.

By comparison, the Taiwanese PCB makers are generally very focused on the notebook industry, which makes them more vulnerable in case of a market downturn.

The Hong Kong-based company also has all of its manufacturing in China, which makes it more cost efficient than its Taiwanese rivals which are still forced to use more costly plants in their home market alongside their investments in new capacity in the Mainland.

One banker close to the IPO notes that Meadville has so far been more focused on technology than scale and is working with various global partners such as Hitachi Chemicals to develop new designs and to identify new trends and company demand increases. However, it also intends to increase its production capacity by 25% per year in 2007-2009, which should help improve gross margins and lead to higher profits, the banker argues.

Still, PCBs may not be the most sexy of industries and although money has been pouring into technology companies globally since the beginning of this year, the outlook for the tech sector remains mixed.

Meadville is looking to raise between HK$1.0 billion and HK$1.26 billion ($129 million to $162 million) by selling 526.6 million shares at between HK$1.90 and HK$2.40. The base deal size will account for 26.3% of the enlarged share capital and will comprise 95% new shares and 5% secondary shares.

The offer will have the usual 90-10 split between institutional and retail investors and there will be a greenshoe that could increase the total deal size by 15% to a maximum $187 million.

The price range values Meadville at about 8.2 to 10.35 times its 2007 earnings, based on consensus estimates. At the bottom end of the range, this will offer a slight discount versus its peers in Hong Kong, Taiwan and Singapore, which trade at an average forward PE of about 9.7 times. Typically though, the Taiwanese PCB makers tend to fetch slightly higher multiples with Nanya Printed Circuit Boards currently trading at 11 times.

Wuyi Pharmaceutical is being offered at more attractive valuations according to sources familiar with IPO, who say the announced price range pitches it at a zero to 31% discount to Shineway Pharmaceuticals and at an 18% to 44% discount to Tongrentang Technologies. Both companies are listed in Hong Kong and are considered better comparables than the flurry of pharmaceutical companies listed in the A share market.

According to market sources, Wuyi is offering 445.15 million shares at a price between HK$1.20 and HK$1.80 apiece for a total deal size of HK$534.2 million to HK$801.3 million ($68.7 million to $103 million). This range will value the stock at a 2007 PE of 8.1 to 11.9 times or at 7 to 10.2 times, depending on which syndicate estimates one is to believe.

The base deal size will account for 27% of the company before the greenshoe, which if exercised could boost total proceeds to $118 million and the public float to 30%. The base deal is made up of 81.5% new shares and 18.5% existing stock, while the greenshoe is all primary shares.

The key selling points, according to market sources, will be the companyÆs high margins and earnings growth with profits growing at a CAGR of more than 35% in the past three to four years.

The fact that the company gets just over half its revenues from Western medicines is also seen as a key advantage versus many of the other Hong Kong and China-listed drug makers which tend to be more dependent either Western or Chinese medicine. The company is also expecting to receive approval in the first half of 2007 to start selling a new Chinese drug in the form of a perilla oil capsule that will reduce blood cholesterol levels. If this does happen it could have a significant boost to earnings, observers say.

Both companies will launch the Hong Kong IPOs on January 22 and close the books on the 25th. Wuyi will fix the price on that same day and will start trading on February 1, while Meadville will follow a day later with pricing on the 26th and the trading debut on February 2.

¬ Haymarket Media Limited. All rights reserved.
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