The pricing this weekend of a HK$19.83 billion ($2.54 billion) offering by Link Reit sees the Hong Kong government set the record for the world's largest Reit IPO for the second year in a row. In December 2004, a similarly sized offering was de-railed by a legal challenge from two disgruntled tenants between pricing and listing.
This year the Hong Kong Housing Authority is quietly confident its deal will start trading on schedule this Friday at HK$10.30 per unit. Having been marketed at HK$9.70 to HK$10.30 per unit, the 1.926 billion unit offering was priced on Saturday by lead managers Goldman Sachs, HSBC and UBS. There is also a 211.6 million greenshoe, which could increase proceeds to $2.8 billion
Demand was far more muted than last year, with the total order book closing at the $47 billion level, of which Hong Kong retail comprised $13.88 billion compared to $36 billion in December 2004. However, while direct comparisons with 2004 cast an undeniable pall over 2005, they should not detract from what has been a strong response by the standards of any normal stock market.
What has been lacking is the kind of IPO mania to which Hong Kong is often prone. In this instance, higher margin finance rates, the lack of immediate trading gains from China Construction Bank's recent IPO and a weaker tone for the property market are likely to have kept a lot of speculative money at bay.
Notwithstanding, both the retail and international order books for the deal were well oversubscribed, with the retail tranche closing 19 times oversubscribed and the international tranche 18 times oversubscribed. Because the retail order book was more than 15 times oversubscribed, the first clawback has been triggered, bumping the retail allocation up from 30% to 40%.
On top of this, a further 9.3% has been allocated to the Mandatory Provident Fund (MPF) scheme and 3.3% to Hong Kong based charities and foundations. This brings the total Hong Kong allocation up to 52.6% based on the pre-shoe offer size.
However, a significant portion of the international tranche was also Hong Kong money. Geographically, this tranche has a split of 60% Asia, 25% Europe and 15% US.
Of the $33 billion in demand, about 52% came from institutions, 26% from private banks,11% from corporates, 8% from the Japanese POWL (Public Offer Without Listing) and the remainder from the MPF and local charities.
In terms of allocation, institutions were allocated 26.6%, private banks 3.5%, corporates 9% and the Daiwa SMBC-led POWL 3.5%. Strategic investor Capitaland was allocated the remaining 4.8%, or $120 million.
This represents a far more balanced allocation than 2004 when the international tranche was severely squeezed by huge retail take-up and pre-arranged allocations to a group of cornerstone investors and one strategic investor - Capitaland.
Last year institutions, corporates and private banks combined were allocated just 9.9% of the deal and the POWL an even more miserly 0.7%. The bulk went to retail - 56.5% plus another 8.3% to the MPF - and the pre-IPO investors, which got 24.7% - 18.7% to nine cornerstone investors and 6% to Capitaland.
Unlike 2004, there has been no cap on institutional orders this year and as a result, the leads ended up with 30 orders topping $100 million. In 2004, no one institutional investor was allowed to place an order for more than $50 million.
Just over 400 institutional orders were counted in total compared to 670 in 2004. On the retail side, there were applications from 255,000 investors compared to 510,000 in 2004.
Similar to 2004 about 80% of the retail demand came from about 5% of the investors. However, because the government is keen to weight the deal in favour of smaller investors, all applicants will receive at least one board lot.
Specialists calculate retail investors will receive 6.7% of the amount they ordered compared to 4.7% in 2004. "In many ways it's been a much easier allocation process this year than last," says one. "No-one got squeezed and everyone that applied for units got at least the same, or slightly more than they would have done last year."
At HK$10.30 per unit, Link Reit has been valued at a 3% premium to NAV and will yield 6% on a forward basis (March 2007 year-end). Retail investors receive their units at a 5% discount.
This is the same discount they received from Hong Kong's last privatization in September 2000 when the government raised $1 billion from the partial privatization of MTR Corporation. This saw applications from 600,000 retail investors, but less local demand - $6 billion.
The new deal beats its predecessor in both size and scale. It also finally gets a domestic Reit sector up and running after a one-year delay and an aborted bid by Cheung Kong to pip it to the post.