Most retail investors stuck with their earlier decision to invest in Sun Art Retail Group’s initial public offering after the China-based hypermarket operator was forced to delay its trading debut and reconfirm all retail orders due to an error in the original prospectus.
And after an initial dip when the error was discovered, the grey market price for Sun Art has returned to its earlier levels, indicating the possibility of a 20% gain when the stock starts trading. The actual trading debut isn’t until next Wednesday (July 27), but at the moment, at least, it looks like the hiccup will have had little impact on the deal.
This is particularly true since the delay will have no impact on the size or pricing of the deal. As reported earlier, Sun Art fixed the IPO price at the top of the indicated range for a total deal size of HK$8.24 billion ($1.06 billion) after attracting massive demand from both retail and institutional investors.
According to sources, 93.3% of the shares initially allocated to retail investors were reconfirmed and as a result, the size of the retail tranche will drop to about 18.7% of the total deal from 20%. Observers believe few, if any, retail investors chose to drop out, but rather some may have missed out on reconfirming their subscriptions because they were travelling or were unaware of the need to do so.
The slight decline in the final retail take-up poses no problem for the deal as a whole as most institutional investors said already last week that they were keen to increase their allocation if more shares were to become available. Institutional investors also reconfirmed 99.9% of the initial order amount allocated to them, the sources say, resulting in an overall take-up ratio of 98.8% since the prospectus error came to light a day before Sun Art’s original trading debut on July 15.
The Hang Seng Index fell slightly on the first two days after the news, but has since recovered and yesterday closed 0.2% above last Thursday’s level. Meanwhile, the grey market price, which fell to HK$7.60 from a high of HK$8.28 after news of the delay started to trickle out, has since rebounded to about HK$8.60 to HK$8.70, according to bankers. Sun Art fixed the IPO price at HK$7.20 per share, which equalled a 2011 price-to-earnings multiple of 31.5 times and a slight premium to its closest comparables. That premium has narrowed slightly as the comps too have risen in the past week.
While few people expected investors to pull out — this was after all one of the most popular IPOs in Hong Kong this year — there was always a risk that another sharp decline in the secondary market would make Sun Art’s valuations look expensive. And that could potentially have prompted some investors to rethink their investment. Hence, the banks involved in the deal will be relieved that the IPO it is now done and dusted — for the second time.
The institutional portion of the deal attracted more than 500 investors and retail investors initially subscribed to 42 times the number of shares earmarked for them, which triggered a clawback that increased the size of the retail tranche to 20% from 10%. It was the first clawback on a Hong Kong IPO since MGM China’s $1.5 billion IPO at the end of May and also the first deal of size since MGM China to price at the top of the range.
Clearly it would have been highly controversial for such a well-received deal to fail because of a prospectus error — especially one that doesn’t seem to matter that much to most investors.
According to a statement issued last week, the prospectus overstated Sun Art’s historical earnings per share because it failed to take a recent stock split into account when making the calculation, as required by the Hong Kong listing rules. Most people tend to look at the historical net profit trend on a total basis rather than on a per share basis, but the Hong Kong stock exchange, in its quest to protect retail investors, requested that Sun Art file a supplementary prospectus and give retail investors a chance to withdraw their orders.
Citi, HSBC and UBS were joint global coordinators and sponsors for the IPO, which makes them ultimately responsible for the prospects. However, the financial information in the prospectus is also the responsibility of the directors of the company and the auditor, which in this case was KPMG. BNP Paribas, China International Capital Corp, Goldman Sachs and Morgan Stanley acted as joint bookrunners together with the global coordinators.
Sun Art is owned by Taiwan’s Ruentex Group and France’s Groupe Auchan and operates 197 hypermarkets in China under the dual brands of RT-Mart and Auchan.