HK Electric trust to bring first large IPO in 2014

The $4 billion to $5 billion deal is scheduled to launch on January 14 and is expected to be followed by a number of other large listings in the first half.

HK Electric Investments looks set to become Asia’s first large initial public offering in 2014 after bankers started investor education on Monday for a deal that could raise as much as $5.7 billion.

The business trust-like entity, known in Hong Kong as a fixed single investment trust, is a spin-off from Li Ka-shing-controlled Power Assets Holdings, which is one of the two power producers in Hong Kong. The company said last month that it is aiming for a separate listing of its Hong Kong electricity business by January 29. Power Assets’ shareholders formally approved the spin-off on Monday, clearing the final hurdle for the IPO to hit the market.

According to Power Assets’ mid-December announcement, the plan is to sell between 50.1% and 70% of the trust and the market capitalisation is expected to be between HK$48 billion and HK$63.4 billion ($6.2 billion to $8.2 billion). The shareholders’ approval obtained yesterday is contingent on the market cap being at least HK$48 billion. (For further details on the deal structure, please see our story published on December 17).

Sources say the IPO, which is arranged by Goldman Sachs and HSBC, will be done on an accelerated timetable with the management roadshow and bookbuilding due to start on January 14. This will allow the parent company to stick to its original plan for a listing on January 29 – just two days before the Hong Kong market closes for a four-day weekend to celebrate the Lunar New Year.

The fact that this major holiday falls quite early this year is likely to limit the number of Hong Kong IPOs hitting the market in January. The time left before the upcoming break is not long enough for a full marketing schedule and most issuers are reluctant to have their offerings straddle the Lunar New Year – particularly since the Chinese markets will be closed for a full week (January 31 to February 6).

The market is full of chatter about other big deals in the pipeline, however, and even though the secondary markets have been quite weak since the start of the year – the Hang Seng Index is down 2.7% after the first three trading sessions – bankers and other market watchers are optimistic that 2014 will be a stronger year for new Hong Kong listings than 2013.

According to its annual forecast issued last week, auditing and professional services firm PwC projects that the amount raised through IPOs in Hong Kong will increase to more than HK$250 billion this year from HK$169 billion in 2013 and HK$89.8 billion in 2012.

To be sure, there is greater visibility on multi-billion dollar deals right now than there was this time last year, with several of the biggest transactions expected to happen in the first half.

Depending on how big a portion of the trust will be sold to public investors, HK Electric could raise between $3.1 billion and $5.7 billion from the listing – market sources say a deal between $4 billion and $5 billion is most likely – which would exceed the $3.0 billion raised by China Everbright Bank in December.

The Beijing-based bank that is already listed in Shanghai was the largest Hong Kong listing in 2013, although due to a rich valuation and lack of differentiation versus other Hong Kong-listed Chinese banks it was mostly sold to China-based investors.

And HK Electric is by no means the largest deal in the pipeline. Investors are particularly excited about Shuanghui International, a Chinese pork producer rumoured to be looking for an IPO of between $5 billion and $6 billion, and A S Watson Group, the consumer retail entity owned by Hutchison Whampoa (also controlled by Li Ka-shing), which is expected to be even bigger.

Shuanghui bought US-based Smithfield Foods in September last year for $4.7 billion – the largest ever Chinese takeover of a listed US company – and is ready to recoup some of that money through an IPO that could value the Chinese firm at about $20 billion. BOC International, Citic Securities, Goldman Sachs, Morgan Stanley, Standard Chartered and UBS are said to be working on the deal, which appears to be timed for early in the second quarter.

The IPO of Watson comes after Hutchison attempted to sell its ParknShop supermarket chain through an M&A transaction in October last year. That deal fell apart after the main bidder dropped out and the seller failed to achieve its desired valuation.

A separate listing of the entire Watson unit, which includes ParknShop as well as several other retail chains in 30 markets around the world, should result in significantly more cash for the parent company, however, and will allow it to restructure the debt held by the unit. It will also give investors a much wider exposure to the consumer retail sector.

Bank of America Merrill Lynch and Goldman Sachs, which also handled the aborted ParknShop sale, are working on the Watson IPO together with HSBC. The review of the retail unit has been going on for a while and the deal could hit the market in the next six months, sources say.

And then there is Citi-backed China Guangfa Bank, which has been preparing for a listing for several years and was earlier looking to raise as much as $5 billion from a concurrent IPO in Hong Kong and Shanghai. According to sources, it is finally getting ready and the fact that China has re-opened its IPO market this month after a regulatory ban on new listings that lasted for more than a year may make it possible for Guangfa to pursue its dual-listing plan.

However, as demonstrated by the IPOs of China Everbright Bank last month and Bank of Chongqing and China Huishang Bank in October and November, Chinese banks are facing a tough challenge convincing international investors to support their deals given that there are already more than 10 mainland banks listed in Hong Kong. And the job is made even harder since their offering prices are subject to regulatory limits.

But Chinese lenders do need to strengthen their capital reserves and since they seem okay with having most of their shares being placed with Chinese investors, there are likely to be more deals coming on the back of the three listings in the fourth quarter last year.

The Wall Street Journal reported on Monday that Harbin Bank is planning to file an application this month for a Hong Kong IPO of about $1 billion and said the deal could come as early as the second quarter. Three Chinese banks, ABC International, BOC International and CICC are mandated for the deal, according to the same report.

Singapore Reits
Outside of Hong Kong, bankers have been doing investor education for a Singapore IPO of a commercial property real estate investment trust (Reit) backed by Overseas Union Enterprise since mid-December and one source said yesterday that the aim is to start the bookbuilding shortly. CIMB, OCBC and Standard Chartered are joint global coordinators, while Citi, JP Morgan and RHB OSK are joining them as bookrunners.

The Reit includes the high-end OUE Bayfront office building in Singapore, which counts Bank of America Merrill Lynch among its tenants, as well as the Lippo Plaza in Shanghai and is looking to raise about S$500 million ($394 million).

If it goes ahead, it will be the second Reit backed by OUE to list in Singapore in just six months. In July last year, the Singapore real estate developer, which is controlled by Indonesia’s Riady family, raised $470 million from the IPO of OUE Hospitality Trust – a hotel-focused Reit that at the time of listing included the Mandarin Orchard hotel and an attached retail mall.

Yield-focused IPOs were not that popular with investors in the final few months of last year, however, as the expected cut-back in the US bond buy-back programme sent interest rates and bond yields sharply higher and investors refocused their attention on growth plays. That does not appear to have changed and issuers of Reits and business trusts are likely to have to offer a pretty attractive yield as well as quality assets in order to attract investors, sources say.

Again, issuers appear undeterred. Korea’s Lotte Shopping is in the process of seeking regulatory approval for a listing of a shopping mall-focused Reit in Singapore and last week

Singapore-listed Keppel Telecommunications & Transportation said it is exploring the possibility of establishing a date centre Reit and listing it on the Singapore Exchange.

Both of these companies have bluechip backing and should attract at least initial interest from investors. The Keppel announcement also got a big thumbs-up from the equity market with its share price jumping 14.6% the following day (January 3). It dropped 2.5% yesterday but remains well above the pre-announcement level, which suggests investors believe the spin-off of the data centres will release some hidden value.

The company said it has yet to decide which properties may be injected into the Reit and at what terms.

Aside from data centres, Keppel T&T is also involved in logistics in Southeast Asia and China, and in 2012 it posted revenues of S$137.5 million and a net profit of S$55.5 million. The company is about 80% owned by Singapore conglomerate Keppel Corp, which has businesses across property, infrastructure, mining and the construction of rigs and specialised ships. Keppel is in turn controlled by Temasek Holdings.

Lotte Shopping is expected to raise about $1 billion from its Reit spin-off and sources say DBS, Goldman Sachs, Nomura and Standard Chartered are mandated for the transaction.

Power Assets said Monday that 99.7% of its shareholders voted for the spin-off of the Hong Kong electricity business, including its immediate parent company, Cheung Kong Infrastructure.

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