Hua Hong prices IPO towards bottom

Chinese foundry manufacturer completes deal as Hong Kong equity markets stabilise.

Chinese foundry manufacturer Hua Hong Semiconductor priced its 228.7 million initial public offering towards the bottom end of its price range on Thursday. The Goldman Sachs-led deal raised HK$2.57 billion ($330 million) pre-greenshoe after pricing was fixed at HK$11.25.

The group had originally marketed its IPO on a HK$11.15 to HK$12.20 range but tightened it one day before pricing to HK$11.15 to HK$11.25. There is also a greenshoe of 34.3 million shares, while Daiwa and BNP Paribas acted as co-leads.

The Hong Kong IPO closed 12.8 times covered, just below the first clawback trigger, which indicates a fairly positive response from Hong Kong retail investors considering the general market backdrop and Occupy Central protests. Keeping the retail allocation at 10% should also ensure more stability when the stock lists on October 15.

Some 60 institutions were allocated stock, with the top 10 accounting for 70% and comprising Asian and global long-only funds. This figure also includes two cornerstones: Shenzhen-listed fabless company Tongfang Guoxin Electronics, which picked up $15 million and Nasdaq--listed fabless client, Cypress Semiconductor, which took $10 million. 

Sources close to the deal described it as one of the best mid-cap order books they had seen in several years. "It's nice to see an old school hard tech deal and there were several long-only funds which placed strike orders," one commented. "But a fair few other funds had limit orders at 2014 book value, so that is where the company decided to price."

At HK$11.25 per share, the deal has been valued at a 23.6% discount to rival Chinese foundry manufacturer SMIC. The latter is currently trading at 1.3 times 2014 book and 1.2 times 2015 book. 

Over the past three trading sessions in New York, the stock rose 4.7% to close Wednesday at US$5.34. However, during Hong Kong trading on Thursday it fell 3.61% underperforming both the Hang Seng Index and China Enterprises Index.

In the absence of any stock specific news, bankers attributed the sudden drop to pair trading - shorting SMIC in the belief Hua Hong will trade through it. In their IPO research reports, syndicate banks have assigned Hua Hong a fair value of 0.9 to 1.3 times 2015 book value, above SMIC.

Both companies trade at a discount to TSMC subsidiary, Vanguard International, which is currently valued at 2.8 times 2015 book. It has been fairly stable in recent days, trading up 0.9% over the past three trading sessions in Taiwan.

Hua Hong is likely to have benefited from stabilising equity markets in Hong Kong. The Hang Seng Index has risen 2.6% so far this October, while the China Enterprises Index is up 1.6%. 

Brokers are also reporting new stimulus measures from China, which could give the market further support in the coming days. According to reports from China, the most recent State Council meeting has approved new investment projects covering natural resources, water treatment, IT networking and infrastructure. 

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