HK IPO pricing immune to A-share jitters

The IPOs of Legend Holdings and Red Star Macalline last week defied plummeting A-shares to price at the top, as books opened for Universal Medical's HK float.
A double-digit drop in A-shares did not affect sentiment for Legend or Red Star
A double-digit drop in A-shares did not affect sentiment for Legend or Red Star

A near-12% drop in China’s A-share markets last week has not affected Hong Kong’s IPO market, with a number of issuers pricing shares at the top of the range, indicating there is still demand for primary offerings.

Despite plunging markets last week, Red Star Macalline Group, backed by private equity firm Warburg Pincus, managed to price its shares at the top of its indicative range and raise $931 million in its IPO.

Meanwhile Legend Holdings, the largest shareholder of personal-computer maker Lenovo Group, raised just over $2 billion in its floatation. Allocations were still being finalised Sunday night in Hong Kong, but a source close to the deal said shares would price only two cents off the indicative range, allowing the company to raise just over $2 billion from the IPO.

Red Star Macalline, dubbed China’s version of Ikea, was showing price sensitivity towards the bottom of its range during the bookbuild last week, mainly from hedge fund investors.

The deal was pitched at a discount to better-known offline retailers such as Gome, which is trading at 19.40 times earnings, and Home Depot and the UK’s Kingfisher, which are valued at 22.99 times and 17.6 times, respectively.

Despite hedge funds pushing for a lower share price, strong demand from a number Chinese long-only investors allowed the issuer to price 543.6 million primary shares at the top of the range at HK$13.28 per unit. A fully exercised greenshoe will boost the share-size by 81.5 million shares and tack on an additional $140 million.

Ninety percent of the deal went to institutional investors and the remainder to Hong Kong retail investors.

The book was multiple times oversubscribed, with half going Chinese long-only investors and mainland high-net worth individuals. There was also demand from long-only institutional investors from the US and Europe, according to a source close to the deal. There were over 200 lines in the book, with 70% of the allocations going to the top 25 investors.

CICC, Goldman Sachs and Morgan Stanley were joint sponsors, while Citi and CMS acted as joint global co-ordinators.

Legend’s flotation has had solid demand since books opened. The company’s strong brand name and attractive valuation resulted in the institutional tranche being oversubscribed in the second day of bookbuilding on June 16.

The deal was marketed at a price range of HK$39.80 to HK$43 per unit, with all 405.88 million shares primary and representing about 15% of the company’s outstanding share capital. On a post shoe basis, this price range represented a valuation of 13.2 to 14.3 times its 2015 earnings, and a price-to-book of 1.4 to 1.5 times. UBS and CICC handled the listing.

Allocations were still being finalised over the weekend, but a source close to the deal said on Sunday shares would price at $42.98, just two cents off of the top of the range. UBS and CICC were the leads on this deal.

These listings come amid sharp volatility in China’s A-share markets, leaving some investors wondering whether the markets are experiencing a temporary pullback or if the recent rallies have run their course. The Shanghai Stock Exchange Composite Index fell 11.6% from June 15 to June 19, while the CSI 300 Index dropped 11.2%.

The drops coincided with the mainland’s regulatory moves to put a cap on brokerages’ margin financing business over the June 13 weekend. BOC International research argues that the bubble in China is at an advanced stage. The company’s chief China strategist Hao Hong noted that “a prevalent strategy among professional fund managers is to follow the crowd, but flee if the market turns sour.”

Still, the source noted that the fact that both Red Star Macalline and Legend were able to have such successful listings shows that there is still investor confidence.

"There still seems to be good bid for primary paper in China, not withstanding what's been happening in secondary markets for the past two weeks," the source said.

To be sure, volatile markets have impacted other listings — China’s largest coalbed methane producer AAG Energy priced its shares at the bottom of its indicative range on June 17 amid weaker investor sentiment and a high valuation.

CICC and HSBC, the joint sponsors on AAG Energy, initially marketed the deal at HK$3 to HK$3.7 per unit. Shares priced at HK$3 per unit. The banks also had to cut the greenshoe back by almost half to 8%, allowing the issuer to raise $318 million. AAG Energy raised $294.7 million from the base deal and an additional $23.5 million from the greenshoe.

Universal Medical
Other issuers are seeking to replicate the success of Red Star and Legend and come to market.

Books for Universal Medical Financial & Technical Advisory Services, the Chinese healthcare leasing business and healthcare service provider, open on June 22.

The company, also known as UMS could raise up to $546 million in its Hong Kong IPO.

Some 423.2 million shares will be on offer at an indicative price range between HK$7.68 to HK$10 per share. The shares, all primary, represent 25% of the enlarged share capital, according to a term sheet seen by FinanceAsia.

The issuer has already locked up some $200 million from cornerstone investors, which include E Fund, Shenwan Hongyuan, Hainan Airlines' subsidiary Beijing Chiang, Nikko Asset Management and Beijing Infrastructure.

Books formerly open under joint leads Nomura and Goldman Sachs. The deal is scheduled to price June 30. Although market volatility could have an impact on the book-build, one source close to the deal said he expects the deal will be covered after the first day given the positive feedback he has received during pre-marketing.

UMS, which provides integrated services including leasing, advisory and procurement services, has few direct comparables. The banks are grouping companies that offer similar services to UMS into three categories -- leasing, health services and software development.

One comp is Far East Horzion, a lessor that targets the healthcare and education industries. Far East Horizon is currently trading at 7 times 2015 earnings and 5.8 times 2016 earnings.

UMS is being pitched at a premium to Far East, with Nomura estimating a value of 19.5 to 29.8 times 2015 earnings. The syndicate argues strong margins and growth rates justify the hefty valuation -- Nomura is forecasting its revenue and profits to grow at a compound annual growth rate of 47% and 54%, respectively, over the next two years, driven by leasing volumes as hospitals seek to improve clinical equipment.

UMS became the second largest healthcare leasing business in China in 2014 with an 8% market share, according to Frost & Sullivan research. Although with healthcare leasing, which comprised of 45% of its total full year revenue in 2014, UMS provides healthcare industry, equipment and financing advisor services, which accounted for 28% of its revenues last year.

More recently, the company has begun providing clinical department upgrade services, building this unit in the past four years. This comprises of 5% of 2014’s revenues. In the future, the group plans to focus on hospital digitalisation.

From 2012 to 2014, UMS generated revenue from 741 hospitals, predominantly city and county hospitals with strong cash flow. These hospitals — which make up 97% of UMS’ current customer base — are particularly underdeveloped and in desperate need of service upgrades.

Nomura's June 11 research report notes that the valuation will not only depend on prevailing market risk, but also based on how successful investors believe UMS’ new businesses will be. “A secondary sum-of-the-parts valuation based on
average consensus full year 2015 p/e multiples for leasing, hospital IT and other healthcare services implies an estimated full year 2015 p/e of around 25 times, near the mid-point of our valuation range,” Nomura research read.

China’s local hospitals need to streamline the healthcare system process for patients, doctors and hospitals alike. The Nomura research describes the administrative process as “messy”, noting that very often, patients need to consult with an outpatient department physician or surgeon who decides if the patient needs to be hospitalized. “This results in congestion in the outpatient registration area of the hospital,” the research read. “Long waiting times at local hospitals have traditionally been one of patients’ largest complaints.”

Records are kept manually, with Nomura noting that “due to idiosyncratic handwriting and the use of non-standard abbreviations, physicians could only read an average of 83% of the content of older paper-based medical records.”

The cleanliness standards are also lacking, especially at hospitals and departments with less modern facilities. Sample containers are often left open for patients to collect and use, an area that would be “rife for contamination,” Nomura said.

However, government is taking steps to improve the country’s healthcare system. It increased public sector spending from 2009 to 2011, investing Rmb36 billion ($5.8 billion) to develop 2,176 county-level hospitals over the next three years. The government also pledged to spend Rmb5 billion to purchase equipment for 2,130 county-level hospitals, and an additional Rmb84 billion for a grassroots tele-consultation and high-end remote consultation system.

These reforms come as China experiences a sharp bump up in overall health expenditure, a result of more disposable income.

Ultimately, as Chinese people pay more for healthcare and as the government boosts spending for the industry, companies like UMS stand to benefit tremendously.

¬ Haymarket Media Limited. All rights reserved.
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