Following a listing hearing on Thursday, pre-marketing is scheduled to begin next Tuesday for an IPO that should raise between $360 million and $460 million for Gordon Wu's infrastructure projects in Guangdong province. Citigroup is running the books on the deal, which represents a spin-off from Hopewell Holdings and will constitute a new share offering for 25% of the company. Existing Hopewell shareholders will also be offered one warrant for every 10 shares by way of a special dividend.
Under the current timetable, the deal will price at the very end of July and like Bank of China and China Telecom before it, will incorporate a Public Offering Without Listing (POWL) in Japan. Daiwa SMBC will handle this part of the transaction and has been earmarked roughly 10% of the placement tranche.
Previous deals playing on Japan's obsession with the China growth story have been well-received by domestic retail investors and Hopewell is undoubtedly hoping an additional distribution channel will aid pricing towards the top end of the indicative range. At the same time, it should also prove an interesting test of Japanese sentiment towards China in a post SARS environment.
The deal will have the standard allocation split, with 90% of the deal being sold through a placement tranche and 10% to Hong Kong retail. Alongside Citigroup, BOCI will act as joint lead, with BNP Paribas Peregrine, JPMorgan and Morgan Stanley as co-leads. There will also be three further co-managers - CLSA, ING and UOB.
Key to the deal is the premium it can secure over listed comparables such as Zhejiang Expressway and Jiangsu Expressway in eastern China. Over the past two years, the sector has undergone something of a renaissance with investors and been re-rated from a high single digit p/e multiple to one in the mid-teens.
The sector currently averages 15 times 2003 forecast earnings and investors say this is where HHI will price if it comes in at the very bottom end of the range. On a DCF basis, the deal is being pitched at a discount of 15% to 25%.
The toll road sector is said to have returned to favour because it combines attractive dividend yields with stable but high growth rates averaging a slight premium to GDP growth multiples. Existing stocks average a yield around the 4% level, equating to pay-out ratios of 60% to 75% of net income.
Investors say Hopewell will initially offer a more attractive dividend, although many are likely to wonder how sustainable it will be if the company embarks on a costly capital expenditure programme, or the government reduces tariffs. Indeed, one of management's main tasks during roadshows will be persuading investors that the conservative balance sheet management of recent years will not give way to another phase of grandiose expansion plans and excessive debt.
The company has already indicated that all projects currently under consideration have been pre-funded and that it is not intending to make further cash calls on investors over the short to medium term. What it will try to put across is its long-standing track-record in China and international management expertise, which results in projects with much greater investment returns than the law of diminishing returns applied to asset injections into listed SOE's.
With the exception of Shenzhen Expressway, which has a very small market capitalization, HHI will provide investors with their only exposure to infrastructure projects in the fast growing Pearl River Delta region, where traffic growth has consistently increased by a CAGR of 10%. And in line Hopewell's vision for the economic integration of Hong Kong with the Mainland, some of the proceeds will go towards the construction of a 29km bridge, linking the Territory with Macau and Zhuhai (pending permission from the Chinese government).
For Hopewell Holdings itself, it is hoped that the spin-off will unlock value. It is, for example, believed that the Hopewell's NAV (Net Asset Value) will be adjusted upwards from approximately HK$15.75 per share to between HK$16.39 and HK$17.13. Post offering and pre-greenshoe, Hopewell will own 75% of HHI.
The main asset in the listco is the 122.8km Guangzhou-Shenzhen Superhighway, which operates under a 30-year concession starting in 1997. The company has a 50% profit share for the first 10 years, dropping to 45% for the final 10-years. It typically secures 75% of its revenue base from this one asset.
Other assets include a 38km East-West ring road in Guangzhou and phase 1 of the Western Delta Route, a 14.7 km, which links the East-West ring road to Shunde. Phase 2 and 3, which will extend the route a further 42km to Zhongshan are currently under construction.
According to investors, figures they have been shown to date reveal unaudited, pro-forma profits of $66.7 million for 2000, $77.2 million for 2001, $68.44 million for 2002 and $55.75 million for the 10 months to April.