Kerry Logistics sets range for up to $284 million IPO

The spin-off from Kerry Properties will be fully covered when it opens today after attracting a lot of interest from international investors. Meanwhile, bankers start investor education for China Everbright Bank.

Kerry Logistics Networks will start the management roadshow and institutional bookbuilding for its Hong Kong initial public offering on Monday and has set a price range that will allow it to raise between $245 million and $284 million, according to sources.

The logistics service provider is being spun off from Hong Kong-listed Kerry Properties, which is also distributing close to 44% of the company to its existing shareholders free of charge.

Like several IPOs coming to market in the past few weeks and the upcoming offering by China Everbright Bank, the deal will be fully covered at the time of launch by anchors and other order indications. But contrary to many of the others, Kerry Logistics is attracting the attention of international investors. And according to one source, it is already multiple times covered by bluechip long-only investors and hedge funds.

Being focused on logistics in Greater China and Asia, which are referred to as the fastest growing logistics markets globally, suggests a bright outlook and Kerry Logistics’ revenues have improved by 77% in the past few years, from HK$10.88 billion ($1.4 billion) in 2010 to HK$19.29 billion in 2012. In the first half this year, it generated HK$9.52 billion, which was up 6.3% from the same period last year.

The company is the largest third-party logistics company based in Hong Kong and the third-largest in Greater China and Asean based on revenues, according to independent industry consultant Armstrong & Associates, which is cited in a preliminary prospectus. It has integrated logistics and international freight forwarding businesses in 35 countries across Asia, Australia, Europe and North and South America, but last year it derived about 82% of its revenues from Asia.

The company is also backed by the Kerry Group, which is controlled by the Malaysia-based Kuok family and owns 56% of Kerry Properties as well as substantial stakes in the Shangri-La Asia hotel group and the South China Morning Post. Given the group’s track record in terms of both investment and the running of businesses, this is likely to provide added comfort to investors alongside Kerry Logistics’ own experienced management team and track record.

Kerry Logistics is offering to sell approximately 216 million new shares, which corresponds to 13% of its enlarged share capital pre-greenshoe. This is lower than the up to 25% that Kerry Properties earlier flagged might be up for sale, which according to a source is due to the fact that the valuation implied by the price range is lower than what the parent company had originally hoped for.

The price range has been set at HK$8.80 to HK$10.20, which implies a market capitalisation of between $1.9 billion and $2.2 billion. It also translates into a 2014 price-to-earnings ratio of 14.9 to 17.3 times.

This suggests quite a significant discount to global peers, including Germany’s Kuehne Nagel, which are trading at about 22 to 23 times, the source said.

The price range is based on the feedback received during last week’s investor education and simultaneous discussions with potential anchor investors, and is likely to incorporate at least some element of the fact that the IPO market in Asia (and Hong Kong especially) is very busy right now. As a result, companies may need to offer a bit of extra potential upside as an incentive for investors to focus on their particular deal.

Or as one banker put it: “there is a little bit of deal fatigue out there at the moment.”

As reported, there are already numerous deals in the market, including the up to $2.45 billion IPO of China Cinda Asset Management and the up to $717 million offering of coal-focused Qinhuangdao Port. And in addition to the launch of Kerry Properties, True Telecommunications Growth Infrastructure Fund is also expected to kick off its IPO today. The fund is a spin-off of certain telecom infrastructure assets from Thailand’s True Corp and will be only the second infrastructure trust to list in Thailand after BTS GIF, which is backed by revenues from Bangkok’s Skytrain.

True GIF, as it is likely to be known, is expected to raise between $1.2 billion and $1.6 billion by selling at least 49% of its units to public investors.

And on Friday last week, bankers started investor education for China Everbright Bank, the Chinese regional lender that is already listed in Shanghai and has tried to obtain a Hong Kong listing at least twice before in the past couple of years.

Kerry Properties’ existing shareholders will receive one share in Kerry Logistics for every two shares they own in the parent company,  which means they will hold 43.6% of the company at the time of listing. This, together with the public offering, will see Kerry Properties’ stake in the company fall from 100% to 43.3%.

If the 15% greenshoe is exercised in full, the parent’s stake will drop to 42.5%, according to a stock exchange announcement, and the Kerry Properties shareholders will own 42.7%. In that case, the deal size could increase to as much as $327 million.

In an earlier announcement, Kerry Properties said that the logistics business has grown to a size that is sufficient to warrant a separate listing and added that it will be easier for investors to understand and value this business on its own merits, rather than as part of a conglomerate. The value of Kerry Logistics is “expected to be enhanced through the proposed spin-off,” it said.

According to the preliminary prospectus, Kerry Logistics expects to generate a net profit of HK$1.83 billion this year, which implies a 35% gain compared to 2012. The projected profit includes a chance in fair value of investment properties and a capital gain from the sale of a warehouse in Kowloon Bay.

The order books will close at the end of US trading on December 11 and the trading debut is scheduled for December 19.

BOC International, Citi, HSBC and Morgan Stanley are joint global coordinators for the IPO as well as joint bookrunners together with CIMB.

China Everbright Bank
According to a source, Everbright Bank will offer at least 7.3% of its share capital through the Hong Kong IPO and will raise at least $1.6 billion to $1.8 billion. That amount is based on the fact that it cant price its offering below the net asset value of Rmb3.03 per share (about HK$3.83) that it posted at the end of the first quarter (its latest audited book value).

Bankers will do one week of pre-marketing of Everbright Bank before running a simultaneous institutional bookbuild and retail offer between December 10 and 13. The bank is expected to generate little demand from international funds, however, partly because it looks likely to have to offer its shares at a premium to its Shanghai-listed A-shares.

As of Friday, the A-shares closed at Rmb2.85, which means the floor price is at a 6.3% premium. Based on research from one syndicate bank, the floor price implies a price-to-book multiple of 0.89 times for 2013, which suggests that the bank may not come to market at a premium to forward book value as earlier indicated. It is unclear how that particular research report corresponds to the wider view in the market, however.

The valuation is not likely to matter that much though, since the deal will be fully covered by cornerstones and anchor investors before launch. At the moment, all the investors that have been lined up to support the deal are Chinese and of the kind often referred to as “friends and family”, bankers say.

CICC, Morgan Stanley and UBS are joint global coordinators and bookrunners for the IPO. They will be joined by a number of other bookrunners; namely ABC International, BNP Paribas, BOC International, China Everbright Securities, Essence Securities and Haitong International.

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