Hopewell Highway Infrastructure (HHI) completed a 720 million share offering towards the bottom end of the deal's indicative price range yesterday (Thursday). Under the lead management of Citigroup, the deal was priced at HK$4.18 per share compared to an indicative range of HK$4.10 to HK$4.75 and raised proceeds of $385 million pre shoe.
On the surface, pricing at these levels seems uninspiring. However, the company set out with an extremely aggressive valuation and the institutional order book was consequently said to have been highly price sensitive at the bottom end of the range. From the outset, the leads, therefore, knew their ability to maximize all available distribution channels would be the key to pushing the deal through at a premium to comparable stocks in the sector.
And providing the share price holds up until listing, they appear to have succeeded. Two of the main anchors were the strategic stake taken by Sun Hung Kai Properties and the public offer without listing in Japan (POWL). At 20% each of the placement tranche, both the POWL and strategic stake were double the size initially envisaged by the market.
Observers report that the institutional order book closed two-and-a-half times covered, while the retail order book closed four-and-a-half times covered. The institutional order book encompassed 100 accounts, with no single investor allocated more than 5% of the deal.
Of the placement tranche, representing 90% of the overall deal, institutions accounted for 40%, private banks 20%, SHK 20% and the POWL 20%. Of the institutional demand, 50% was said to have derived from Asia, 40% from Europe and 10% from the US.
As part of an outstanding loan agreement, Bank of China also has an option to purchase 5% of secondary shares at the IPO price within three years of listing.
One of the more noteworthy elements of the deal was the strength of demand from Japan. Paranoia that China would export SARs to Japan clearly failed to crimp the country's love of the Mainland growth story for very long. And with Daiwa SMBC as lead manager, the POWL was allocated slightly less than 20% of overall demand generated by Japanese retail investors.
At HK$4.18 per share, HHI has been priced at 23.1 times 2003 earnings, or 18.6 times on a calendarized basis. The difference between the two figures stems from the fact that while HHI's Financial Year ends in June, comparables such as Jiangsu Expressway and Zhejiang Expressway end theirs in December. The sector as a whole is said to average 18.6 times 2003 earnings.
Hopewell's ability to spin HHI off at a premium to comparables is even more remarkable in the context of the massive re-rating the sector has undergone over the past year. Toll road stocks have jumped from a high single digit p/e to one in the high teens and many analysts caution that the rally is running out of steam. Jiangsu Expressway, for example, has climbed 39.13% so far this year.
Observers believe that Hopewell's ability to secure a premium lies in part to the promise of future projects and in particular the 29km bridge linking Hong Kong to Macau and Zhuhai. The company is said to be bidding for the project in a consortium, which also comprises SHK Properties, Henderson Land, Shun Tak Development and New World Development. Currently 90% of revenues are derived from the Guangzhou-Shenzhen Superhighway.
HHI also differs from its peers in agreeing to a higher pay-out ratio and will run a 5.38% dividend yield assuming a 93% pay-out ratio for the first year.
Alongside the lead, BOCI was joint lead,with BNP Paribas Peregrine, Daiwa, JPMorgan and Morgan Stanley as co-leads and CLSA and ING as co-managers.