Shanghai Fosun Pharmaceutical (Group) yesterday kicked off the institutional roadshow and bookbuilding for the first Hong Kong listing in three months and the biggest since Yitai Coal raised $902 million in early July. As such, the deal will be extremely important as a gauge of investor appetite for Chinese companies.
The private sector company is seeking to raise between HK$3.97 billion and HK$4.6 billion ($512 million to $594 million) from the sale of 15% of its enlarged share capital.
The offering got an early boost after it emerged yesterday that Prudential, which is one of the two cornerstone investors, had decided to increase its investment to $50 million from the $25 million to $30 million that has been reported in the press. The move by the UK-based insurance company signals a lot of confidence in the business and also increases the likelihood that the deal will get done.
Meanwhile, the International Finance Corp will buy $25 million worth of shares, resulting in a total cornerstone investment of $75 million, or close to 15% of the deal at the bottom of the range. In addition to these two, there is also said to be good interest from other long-only investors that is expected to be converted into actual orders during the roadshow.
Fosun Pharma, which is already listed in Shanghai, is essentially a holding company with businesses spanning several sectors of the Chinese healthcare industry. The most significant of these are its manufacturing and distribution of pharmaceuticals, and the manufacturing of diagnostic products and other medical devices. It is also active in healthcare services through its investments in two separate hospitals. This division currently contributes just over 2% to revenues, but is one of the company’s core focus areas.
Many of these businesses are held through listed subsidiaries, including its 32.1% stake in Hong Kong-listed Sinopharm, which is its main drug distribution arm. Fosun Pharma’s controlling shareholder set up Sinopharm in 2003 together with state-owned China National Pharmaceutical Group and transferred its stake to Fosun Pharma in 2004. The business was listed in Hong Kong in September 2009 after a highly successful initial public offering that raised $1.13 billion and attracted $110 billion worth of orders.
The holding company structure gives investors the opportunity to gain exposure to a large number of businesses at a discount to their individual market value. At present, Sinopharm has a market capitalisation of about $7.8 billion, which values Fosun Pharma’s stake in the company at $2.5 billion or about 75% of Fosun Pharma’s own market cap of $3.3 billion.
Last year, Sinopharm contributed about 44% of Fosun Pharma’s net profit, which suggests that the rest of the company’s businesses are undervalued.
“Effectively you are buying Sinopharm quite cheap and you get a call option on the rest of the business,” one source said about Fosun Pharma’s IPO.
Holding companies typically trade at a discount to the sum of their parts, although the listing should help realise some of the hidden value. One source noted that if you exclude the Sinopharm stake the indicated IPO price range values the remaining businesses at a price-to-earnings (P/E) multiple of just 5.4 to six times, which is extremely low for a company in the healthcare sector.
Fosun Pharma is offering to sell approximately 336 million new H-shares at a price between HK$11.80 and HK$13.68, which values the company at 12 to 14 times its projected earnings for 2013.
This implies a discount to other Hong Kong-listed Chinese pharmaceutical companies. The highest valuations are commanded by companies with large distribution businesses, like Sinopharm and Guangzhou Pharmaceuticals which trade at 2013 P/E multiples of 20.3 and 21.7, respectively. More diverse companies, or those with bigger businesses in the early part the value chain, have valuations in the mid-teens. Shanghai Pharmaceuticals, which is viewed as the closest comp, is currently trading at a 2013 P/E multiple of 14.7.
However, since Fosun Pharma is already listed in Shanghai, the pricing has to take into account not only the valuation versus its sector peers, but also the live trading price of its A-shares. And according to Chinese regulations, the H-shares cannot be priced at a wider discount than 10% versus the 20-day average price of the A-shares.
Based on yesterday’s closing price of Rmb10.92 (HK$13.44), the bottom end of the H-share price range implies a discount of just over 12%, while the top end currently implies a slight premium.
Fosun Pharma’s A-shares have gained about 36% so far this year, although they are off from the August high of Rmb11.77. This is likely due to the pending H-share offering, as most other healthcare companies in Asia have continued to perform strongly. The share price also took a dip in September after the company was forced to recall some batches of one of its major drugs after it was found not to meet the quality requirements. However, the incident was deemed to be fairly minor and isn’t expected to have a material impact on revenues. The share price has since recovered.
Healthcare is generally viewed as an attractive sector because of increased government support and spending; increased health awareness and rising disposable incomes among the general public, as well as better coverage through medical insurance; and an aging population in combination with increased life expectancy.
However, the holding company structure and the large number of businesses included under the listco will take some time to digest.
Another potential concern for investors is the company’s strong focus on growth through acquisitions, which adds execution risk and also consumes a lot of management resources. However, sources say Fosun Pharma is aiming to become more of an operational company and part of the proceeds will be used to build up its core businesses within manufacturing of pharmaceuticals, healthcare and diagnostics.
The offering — technically it is a follow-on offering since the company is already listed in Shanghai, although the structure is identical to that of a Hong Kong IPO — will have the usual split with 10% of the shares earmarked for Hong Kong retail investors and the remaining 90% offered to institutional accounts, subject to the standard clawback triggers. The deal also comes with a 15% overallotment option that could increase the total proceeds to as much as $682 million.
The offering will be slightly accelerated to get it done before the Hong Kong holiday next Tuesday. As a result, the retail subscription will open today and the order books for both institutions and retail investors will close on Monday (October 22). The trading debut is scheduled for October 30.