Fosun set to raise maximum amount from IPO

Fosun's exposure to A-shares allows it to attract more than 1,000 institutional investors to its $1.48 billion offering.

Given the strong line-up of cornerstone investors and its promise of providing exposure to A-share companies, it comes as no surprise that Fosun International’s initial public offering should price at the top of the indicative range of HK$6.98 to HK$9.23.

In fact, chairman Guo Guangchang told investors during the roadshow that this was the intention and, although the final price had yet to be formally announced, sources said over the weekend that nothing had changed in that respect.

This means that the Chinese conglomerate, which has been compared both to Hutchison Whampoa and (by the chairman himself) to US buyout firm Blackstone, will raise the maximum HK$11.54 billion ($1.48 billion) that it sought from its Hong Kong listing. In fact, the total proceeds are slightly higher than its initial target after strong demand during the first two days of the institutional bookbuilding prompted the bookrunners to increase the initial price range by about 6.3% at the top end.

The shares were initially offered in a range between HK$6.48 and HK$8.68.

According to sources, the institutional portion of the deal attracted more than 1,000 names, including major corporate accounts, which suggests that the correction in the A-share market during the bookbuilding had virtually no impact on sentiment and that investors did not come into this deal just for a short-term punt. The Shanghai Composite Index fell 11.6% during the roadshow, including a 7.3% drop in the final two days before the deal closed on July 5, amid concerns the government would introduce more measures to control rapid share price gains.

The institutional tranche was about 170 times covered after taking out the $220 million cornerstone tranche and adjusting for the fact that the retail tranche was increased to 50% from 10% after a full clawback was triggered. These numbers also assume a full allocation of the 15% greenshoe, which if fully exercised will lift the total deal size to $1.7 billion.

Whether that happens or not, Fosun already ranks as the third largest IPO in Hong Kong this year after China Citic Bank and real estate developer Country Garden, which raised $4.25 billion (H-share portion only) and $1.9 billion respectively.

The retail tranche was about 235 times covered and tied up HK$272 billion in cash, according to sources, which would have secured it a place among the six most popular retail offerings in Hong Kong - ahead of Bank of China. The top five currently includes shoe retailer Belle International, Industrial and Commercial Bank of China, real estate developer Country Garden, China Citic Bank and China Molybdenum.

The strong demand came despite comments from some fund managers that the valuation at the top end of the price range was a bit rich. However, after Shanghai Industrial rallied 26% during Fosun’s roadshow and Citic Pacific added 5.7%, the initial premium to these two was almost eroded and in the end the order book included virtually no price sensitivity, sources say.

The final price values Fosun at between 18.7 and 21.9 times its 2008 earnings - depending on which syndicate analyst one believes - which compares with 19.9 times for Shanghai Industrial and 19.7 times for Citic Pacific, according to Bloomberg data. The latter two, which are considered its closest comparables, were trading at 15-16 times next year’s earnings when Fosun started marketing.

The high profile of the 11 cornerstone investors also helped to overshadow any initial valuation concerns. Based on the final price, they bought a combined 14.9% of the deal pre-shoe (or $20 million each), and have agreed not to sell their shares for the next six months, which should help stabilise the share price in the secondary market.

The list includes frequent IPO investors Li Ka-shing of the Cheung Kong Group, Henderson Land Development chairman Lee Shau Kee, Chinese Estates executive director Joseph Lau, Dickson Concepts founder Dickson Poon and Malaysian property and media tycoon Robert Kuok; the Government of Singapore Investment Corporation (GIC) and former AIG CEO Maurice Greenberg; and Mainland insurers China Pacific Insurance and China Life Insurance among others.

What makes Fosun so interesting aside from being the largest privately-owned conglomerate in China, observers say, is the fact that it invests in Mainland enterprises and A share listed companies that are otherwise out of reach for international investors without access to a qualified foreign institutional investor (QFII) quota. Part of its strategy is to expand its current portfolio and create additional value by investing in and improving the operations of companies that are currently state owned. The final step is to realise this value through the stock markets.

At present, the company’s main businesses comprise steel (which last year accounted for 73% of the revenue and 54% of the net profit), property development and pharmaceuticals and include stakes in Hong Kong-listed real estate developer Shanghai Forte Land and gold miner Zhao in Mining, as well as in Shanghai-listed Naming Iron & Steel. It also has interests within retail, natural resources and financial services.

The company, which pre-IPO was 100% owned by the four founding partners, sold 1.25 billion new shares, 20% of its enlarged share capital.

China International Capital Corporation, Morgan Stanley and UBS were joint book runners for the offering.

Future investments will focus on raw materials and the financial services space where it already holds a 25.4% stake in Teton Securities, a privately-owned investment bank and brokerage firm with a full securities license in China. The additional capital raised from the IPO will put it in a good position to expand within these areas, sources say.

As a base case scenario, analysts at one of the syndicate banks forecast a net profit growth of 81% in 2007, followed by 51% in 2008 to Rmb2.99 billion. Revenues are expected to increase by 36% this year and by 14% in 2008 due to strong growth in the steel and property business.

The shares are due to start trading on July 16.

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