An IPO for Prosperity Reit was priced at the top of its price range yesterday (December 8) after attracting massive demand from both retail and institutional investors. Under the lead management of JPMorgan and Merrill Lynch, an 888 million unit deal was priced at HK$2.16 per unit, netting the Cheung Kong group HK$1.92 billion ($246 million). There is also a 10% greenshoe, which could bump final proceeds up to $270 million.
The retail order book is said to have closed just over 300 times covered, prompting maximum clawbacks to 50% of the deal. On top of this, three strategic investors were allocated $83 million and a further $12 million was absorbed by a preferential tranche to existing Cheung Kong shareholders who were entitled to one new Reit unit for every 32 shares held.
This left just $52 million (including the greenshoe) to allocate to institutional investors and private banks. The latter two groups placed orders for $4.2 billion, equating to an oversubscription ratio of 80 times the amount stock available to distribute to them.
The book would have been larger still had the leads not closed it one day early and capped orders at $15 million. Nevertheless, it still produced a major allocation headache, which led to the private banking orders being zeroed and 214 institutional investors left with very little paper.
The scramble for stock is already said to have pushed the grey market price up 30%. IPO mania has become a regular feature of the Hong Kong equity markets in the run up to Christmas and 2005 is shaping up to be no different to the previous two years.
Prosperity Reit has been able to piggyback on the success of Link Reit - the Territory's first Real Estate Investment Trust, which was listed in late November. Having witnessed its first one day fall on Wednesday, the stock bounced back yesterday to close at HK$13.75, up 40% from the HK$9.79 IPO price available to retail investors.
At IPO, Link Reit's $2.54 billion deal attracted an order book of $47 billion of which retail accounted for $13.88 billion. Prosperity Reit has attracted a retail order book of $6 billion - almost half the amount of retail demand that Link Reit attracted for an IPO that is roughly 10 times smaller.
The success of Prosperity Reit has been attributed to two major factors. Firstly, Reits have performed well across the whole of Asia and are considered a particularly apt investment vehicle for Hong Kong, where property speculation and horseracing remain two national obsessions.
Secondly the Reit is owned by uber businessman Li Ka-Shing and its successful reception is likely to be particularly satisfying for the group after a string of poorly conceived deals.
"I think Cheung Kong will be extremely pleased," comments one observer. "Management have found a good balance between their own objectives and those of investors. They've achieved a good valuation, but still left something on the table to make sure the deal trades well."
Separate to the offering, Cheung Kong and Hutchison Whampoa are subscribing to 29% of the company's shares (pre greenshoe). The deal has been priced on a forward dividend yield of 5.3% and at a 7.6% discount to NAV.