Hainan Meilan: up, up and away

Hainan Meilan Airport defies market conditions with an IPO ten times oversubscribed by institutional investors.

Hainan Meilan Airport raised HK$762 million ($97.9 million) from its Hong Kong IPO yesterday (Wednesday) on the back of strong strategic and institutional bid for its stock. The deal was priced at HK$3.78 a share, right at the top end of its indicative price range of HK$3.15-HK$3.79 a share. The sale represents 45% of the company's share capital.

Hainan Melian Airport is the main airport on the southern Chinese island of Hainan, known as the Hawaii of China. It is a popular holiday destination due to its sub tropical climate and relaxed atmosphere. In 2001 the island received 11.25 million visitors of which 10.79 million were Mainland Chinese.

HSBC was global coordinator, bookrunner, joint sponsor and joint lead manager of the deal. Oriental Patron Asia was joint sponsor and joint lead manager. Co-leads comprised Citic Capital Markets, ICEA Capital, ING and Nomura International.

Some 90% of the deal was sold through an international placement to institutions and 10% was sold to Hong Kong retail investors. The institutional portion was 10 times subscribed while the Hong Kong retail portion was five times subscribed. In total the company sold 201.7 million shares of which 198 million were new shares and 3.7 million came from existing shareholders, China Southern Airlines and Central South Aviation Department, which sold their entire stake in the company.

Key to the success of the deal was the presence of Copenhagen Airport, which took 44.5% of the international portion and now owns 20% of the share capital of the company. IATA voted Copenhagen as the best airport in the world in 2000 and 2002. The company was advised by ING.

By getting Copenhagen to make this anchor investment, the lead managers were able to address many of the concerns of investors about the poor corporate governance record of Chinese companies. Copenhagen Airport will get two out of the 10 board seats in the company, and sources close to the deal confirm that Copenhagen's presence contributed greatly to allaying investor concerns over Chinese IPOs after the China Telecom debacle and other recent high profile shenanigans at companies such as Euro-Asia Holdings.

The company and its lead managers had undertaken a relatively extensive roadshow given the size of the deal, visiting Hong Kong, Singapore, London, Edinburgh, Frankfurt, New York, Boston and finally ending in San Francisco on Tuesday this week. During the roadshows, the lead managers presented the company both as a defensive play and a growth stock. At the offer price, the company will offer investors a dividend yield of 6.7%, while as the main airport in one of the fastest growing areas in China, it should present good growth prospects, with a downside protected from global aviation worries.

The closest comparable stock to Hainan Meilan is Beijing Capital Airport, which listed in 2000. With Hainan Meilan priced at nine times projected 2003 earnings, the deal comes at a 20% discount to where Beijing Capital is trading.