Shanghai Fosun Pharmaceutical has raised HK$3.97 billion ($512 million) after pricing its Hong Kong initial public offering at the bottom of the indicated range.
The company, which is already listed in Shanghai, will be the largest new listing in Hong Kong in three months, but it is still unlikely to give issuers in the pipeline the reassurance they are looking for with regard to investor appetite for IPOs.
A key reason for that is that the majority of the institutional demand came from China-based accounts. And even though investors were told on Friday last week that the deal was fully covered, the bookrunners ended up reallocating some of the shares initially intended for institutions to Hong Kong retail investors.
As a result, the retail tranche was increased to 19.6% of the total deal from the original 10%, while the size of the institutional tranche was reduced to 80.4%. The size of the greenshoe was also cut to 3.8% of the total deal (4.7% of the institutional tranche) from the initial 15%. This means that the total proceeds will be capped at approximately $531 million and more importantly, that the bookrunners will have a limited ability to help stabilise the share price when the stock starts trading on October 30.
But at least the deal got done, which is by no means a foregone conclusion in the current market.
Indeed, early yesterday evening Li Ka-shing’s ARA Asset Management pulled the Singapore IPO of Dynasty Reit, which was aiming to raise up to S$955 million ($777 million).
In a statement, ARA attributed its decision to “a marked change in investor sentiment” following a poor after-market performance by several other IPOs, as well as a gradual worsening of the overall market conditions that have been driven by lacklustre earnings from large global corporations in the US and Europe.
However, the lack of institutional demand was likely also caused by the fact that the deal, according to sources, wasn’t viewed to be particularly cheap. It also took a bit of structuring to get to the yield on offer, which is something investors have been sceptical towards in the past.
And on top of that, it was also a very big deal for Singapore. In fact, it would have been the largest new listing in this market this year, ahead of Far East Hospitality Trust which raised $527 million from an IPO in mid-August.
Fosun Pharma, which is essentially a holding company with businesses spanning several sectors of the Chinese healthcare industry, priced its H-share IPO at HK$11.80 a share after marketing the deal in a range between HK$11.80 and HK$13.68.
The final price equalled a discount of 9.9% versus the 20-day volume-weighted average price — just below the maximum 10% allowed by the Chinese regulators. The discount versus the latest closing price in Shanghai was slightly narrower at 9.6%.
Fosun Pharma’s A-share price dropped 2.7% to Rmb10.62 during the five-day bookbuilding, while the overall A-share market edged slightly higher. The IPO closed on Monday, but the pricing wasn’t announced until yesterday morning because Hong Kong was closed for a holiday on Tuesday. The A-share price fell another 2.2% on Tuesday, but recovered some of that yesterday to finish at Rmb10.53.
Similar to other Chinese IPOs in Hong Kong this year, a lot of the demand came from Chinese companies and high-net-worth individuals (often referred to as friends and family), but there was also some interest from Chinese asset managers who already own Fosun Pharma’s A-shares and know the company well, including QDII funds.
Between 20 and 30 of the 70 or so orders came from international investors, but some of those were very small, the source said.
The retail tranche was close to three times covered at the original size, which allowed for the reallocation of shares from the institutional tranche. The institutional portion of the deal was covered, but there was supposedly a lot of inflation in the book that made the bookrunners uncomfortable to allocate the full 90%. In the end, about $100 million of the deal went to retail investors while $412 million went to institutions.
In all, Fosun Pharma sold 336.07 million H-shares, which accounted for 15% of the issued share capital.
The IPO price values the company at 12 times its projected earnings for 2013. That puts it at a discount to Shanghai Pharmaceutical, its closest Hong Kong-listed comparable, which was quoted at a 2013 price-to-earnings ratio of 14.6 times at the close of trading on Monday. As of yesterday, it had fallen a bit further to a P/E of 14.1 times.
Pharmaceutical distribution company Sinopharm, in which Fosun Pharma owns 32.1%, is trading at a 2013 P/E multiple of 20.5, according to Bloomberg.
Aside from Sinopharm, Fosun Pharma also holds stakes in several other listed entities. Its most significant businesses are the manufacturing and distribution of pharmaceuticals, and the manufacturing of diagnostic products and other medical devices. It is also active in healthcare services.
Dynasty, which focuses on commercial properties in China, was set to become Singapore’s first listing with a tranche denominated in offshore renminbi alongside the usual Singapore dollar offering and the failure to complete the deal will be a disappointment for the Singapore Exchange, which is trying to carve out a role for itself with regard to the issuance of offshore renminbi-denominated investment products.
Working in Singapore’s favour is the fact that observers expect the first major equity products denominated in offshore renminbi to be Reits — an asset class that Singapore dominates in Asia ex-Japan — as they offer a higher-yield alternative to the offshore renminbi bank accounts where most of these assets are currently held. Because of their relatively stable revenue and dividend payments, Reits are also seen as less risky than pure equity products and cater well to buy-and-hold investors.
Indeed, the only offshore renminbi IPO so far was a $1.6 billion offering by Hui Xian Reit in April last year. It too is sponsored by Li Ka-shing, but is listed in Hong Kong.
But there seems to be room for pure equity offerings as well. Yesterday, Hong Kong-listed Hopewell Holdings Infrastructure (HHI) broke new ground by completing a small follow-on share sale in offshore renminbi. The new shares will trade as a separate counter alongside HHI’s Hong Kong dollar-denominated shares, making it the first company to take advantage of a new Hong Kong stock exchange dual-currency rule. (See separate story on our website today.)
However, bankers involved in the Dynasty IPO said from the start that they expected most investors to subscribe for shares using Singapore dollars and that did turn out to be the case, although there was some demand in renminbi from private banks.
Sources also argued that the cancellation of the deal had nothing to do with the offshore renminbi tranche. It simply didn’t get enough interest from institutions to get the deal across the line.
Part of the reason was the poor trading debuts of Religare Health Trust (RHT) in Singapore and pay-TV operator Astro Malaysia in Kuala Lumpur, while Dynasty was being marketed. Both stocks started trading last Friday and since then RHT has fallen 11.1%, while Astro has lost 3.7%. However, before rallying 6.25% yesterday, Astro was down 9.3% versus the IPO price.
Most of the demand for Dynasty came from private banks, high-net-worth individuals and some Hong Kong tycoons.
Before launch, the company had also secured two cornerstones — Credit Suisse’s private banking division and Amundi, the combined asset management arm of Credit Agricole and Societe Generale — which had agreed to buy a combined 137.6 million units. At the mid-point of the price range, that translated into an investment of about $100 million.
Dynasty was offering between 1.031 billion and 1.038 billion new units, which corresponded to between 89.9% and 90.5% of the total issue share capital. The remaining 9.5% to 10.1% of the Reit was to be bought by ARA.
The units were marketed at a price between Rmb4.40 and Rmb4.70 each, or the equivalent S$0.86 to S$0.92 for investors subscribing in Singapore dollars. This translated into an annualised yield of up to 7.1% for 2012 and 7.3% for 2013.
However, the yield in the first few years would have been artificially enhanced by a dividend support facility that would use Rmb491 million of the IPO proceeds to increase the total payouts. The sponsor had also waived the rights to parts of its dividends until the end of 2017, increasing the amount available for distribution to other unitholders.
Excluding these measures, the yield would have been only about 3.2% in 2012 and between 4.1% and 4.2% in 2013, according to the prospectus.