Tibetan IPO

First Tibetan company completes HK IPO

A Tibetan bottled-water company lists in Hong Kong, but Hosa and China Outfitters are forced to cancel their deals as investors shy away from mid-cap IPOs.
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Sourced from a Tibetan glacier, 5100 is a luxury water brand in China
<div style="text-align: left;"> Sourced from a Tibetan glacier, 5100 is a luxury water brand in China </div>

Tibet 5100 Water Resources Holdings has raised HK$1.38 billion ($177 million) from its initial public offering and will become the first Tibetan company to list in Hong Kong when it starts trading on Thursday. The producer of bottled mineral water overcame the negative sentiment towards IPOs and was able to fix the price just below the mid-point of the offering range last Friday.

Together with the fact that Prada finished slightly above the issue price on its first day of trading, this provided a glimmer of hope in what was otherwise a pretty gloomy week for IPOs in Hong Kong. As reported earlier, Xing Yuan Power Holdings, a Chinese manufacturer of mid-range diesel generator cores for use in permanently installed and mobile power systems, pulled its IPO on Wednesday and, on Friday, two other mid-cap companies were forced to cancel their deals.

The primary reason, according to sources, was the difficult market environment. Prior to a rebound on Friday, the Hang Seng Index had lost 8.1% in June and the majority of this year’s IPOs above $100 million were still trading below issue price. This is making it particularly difficult to convince investors to buy into smaller deals that are likely to be quite illiquid in the secondary market. And contrary to the large companies that may go into indices that funds benchmark against, there is usually no need for investors to be in these deals. As a result, even companies that are viewed as good from a fundamental point of view are failing to attract sufficient demand.

Hosa International, a manufacturer of indoor sportswear that was aiming to raise up to $211 million, said in an announcement that it had decided not to proceed with its IPO at this time “in light of the unforeseen adverse market conditions and current continuing market volatility”.

It added that it will continue to monitor the market conditions and may revisit the market when the environment improves. The deal was arranged by Bank of America Merrill Lynch.

According to a source, the deal was fully covered at the bottom of the range, but Hosa and its bookrunners were worried that investors would turn around and sell the shares again if the market was to continue to deteriorate between the pricing and the trading debut that was set for later this week. The lead period between pricing and listing in Hong Kong — typically seven days — is longer than in many other major markets and does add to the price risk investors take when buying into IPOs. In New York, new companies start trading the day after pricing.

The second deal to run into difficulty was China Outfitters, a designer of casual menswear, that was looking to raise up to $300 million. There was no information on the level of demand, but the bookrunners never went out with a message to investors saying the book was covered, which is an indication that the deal was undersubscribed. China Outfitters was being brought to market by UBS.

On a more positive note, Newton Resources was rumoured to have priced its IPO during the weekend, although investors have yet to find out about their allocations. Based on the demand indications during the bookbuilding, the price is expected to have been fixed close to the bottom end of the HK$1.75 to HK$2.35 offering range, which means the iron ore mining company will have raised around HK$1.75 billion ($225 million). It was hoping to raise as much as $302 million at the top of the range.

Newton tried to list in Hong Kong just over 12 months ago under the name of China Tian Yuan Mining, but ran into corporate governance problems and has since been taken over by the New World group. The IPO was arranged by Bocom International, Citi, Macquarie and VMS.

Sources said Tibet 5100 may have gotten across the line partly because of its straight forward business plan and high earnings visibility, which it achieves by selling most of the water it produces to corporate clients like railway operators, airlines, banks and hotels as well as government organisations through long-term contracts. Its most important customer by far is China Railway Express, which is the procurement agency for the Ministry of Railways and accounted for close to 90% of its total sales volume in 2010.

However, it is also developing its retail distribution channels in China and it water is now available at higher-end supermarket chains such as Walmart, Carrefour, Metro and Auchan, four and five star hotels, including Shangri-la Hotels, and convenience store chains such as Lawson and Watsons.

According to Euromonitor, Tibet 5100 is the largest producer of premium bottled mineral water in China in terms of sales with a 28.5% market share. Premium bottled water accounted for 7.9% of the sales volume and 45.3% of the revenue of the overall bottled mineral water market in China last year. Tibet 5100’s share of the overall bottled mineral water market was about 2.2%. Its premium status was reinforced in 2009 when it was chosen as the official supplier of bottled water to the ceremony celebrating the 60th anniversary of the People’s Republic of China. It has also supplied the water for the National People’s Congress meetings since 2007.

Its markets its water under the brand “5100 Tibet Glacier Spring Water”, to stress the fact that it comes from a glacial spring located 5,100 metres above sea level in the Nianqing Donggula Mountains in Tibet.

There was no information on the final level of institutional demand, but the deal was said to have been two times covered when the retail offering launched last Monday.

About 50 to 60 institutional investors subscribed to the offering, but the allocation was said to be quite tight with about $100 million going to the top six accounts. On top of that, $60 million was sold to Fubon Life Insurance and private equity fund Profounders, which came in as cornerstones, investing $30 million each. As a result, most of the shares ended up with long-only type funds. About 80-85% of the demand came from Asia, while the rest was generated out of Europe and from some offshore US funds. Given the sensitivity related to Tibet in the US, the deal wasn’t marketed to onshore US investors.

Some local China funds did participate, but according to the source there were more UK and offshore US funds in the book than Chinese funds.

The 10% retail tranche was only 87% covered, which means some of the retail shares were reallocated to institutional buyers.

The company sold 459.29 million new shares, or 18.4% of its share capital, at a price of HK$3.00 per share. This is slightly below the mid-point of the HK$2.62 to HK$3.50 range and translates into a 2011 price-to-earnings multiple of 17.2 times, on a pre-greenshoe basis. The deal was marketed at a P/E ratio ranging from 15 to 20 times.

Tibet 5100 was being brought to market by CCB International, Citic Securities, ICBC International, J.P. Morgan and Oriental Patron.


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