The timing of the offering was almost ideal with the Hang Seng Index surging more than 10% over the past two weeks. It closed at a new record high of 27,142 points last Friday, which coincided with KingsoftÆs final day of bookbuilding. Fellow Chinese online game developer Perfect World has also rallied 69% since it listed on Nasdaq at the end of July, including a 6.3% gain during KingsoftÆs two-week roadshow, sparking hopes of a repeat for the latter.
However, the competition for funds has also been fierce with seven Hong Kong IPOs simultaneously in the market and at least six other companies of size taking advantage of the positive sentiment to raise fresh capital though placements during this period.
But Kingsoft, which has self-developed the majority of its entertainment and application software products, drew solid demand from investors. A source close to the deal says the institutional tranche was about 47 times covered, assuming a partial clawback which will increase the size of the retail portion to 40% of the total deal from 10% initially.
More than 200 institutional investors participated in the deal even though the institutional order book closed a day ahead of schedule.
As of yesterday, the final subscription rate for the retail tranche had yet to be confirmed but according to sources, the number was hovering just below 100 times. Should it go above 100 the full clawback will be triggered and retail investors will end up with 50% of the deal, but the main assumption was that the subscription rate would stop at around 99 times and cap the retail tranche at 40%. The counting was delayed by the fact that it was a public holiday in Hong Kong yesterday.
The price was set at HK$3.60 after being offered in a range between HK$2.90 and HK$3.60.
The deal, which was jointly arranged by Deutsche Bank and Lehman Brothers, ended up being a lot smaller than the $150 million that was talked about a few weeks before the launch after existing shareholders decided to sell fewer shares than initially planned. The primary share portion didnÆt change from the original plan.
In the end, the offering comprised 213.3 million shares, or 20.12% of the enlarged share capital. Only 6.8% were existing shares sold by shareholders including Lenovo, New Horizon, Government of Singapore Investment Corporation (GIC) and Super Faith. After the offering, Lenovo will still hold 8.2%, while GICÆs stake will fall to 16.8%.
Although Kingsoft develops and distributes a range of software, including various personal computer games and application software such as dictionaries, internet security and office software, investors say the key selling point was its online games business.
ôTheir online games business was the focus during the whole investor luncheon,ö one investor recalls.
According to the prospectus, the companyÆs entertainment software business, which includes MMORPGs (massively multiplayer online role-playing games), casual games and mobile phone games, accounted for 68.1% of its total revenue in 2006, while 31.1% came from its application software business. The rest came from other items that werenÆt specified.
According to International Data Corp. (IDC), an international provider of market research and advisory services within the information technology, telecommunications and consumer technology industries, online games subscriptions in China recorded 77.3% year-on-year growth in 2006, while the online games growth was 24%. IDC notes that given the large, relatively young and increasingly affluent population in the country, the online games business will continue to flourish.
Kingsoft is offering three in-house developed MMORPGs (a kind of online role-playing games in which a large number of players interact with one another in a virtual world) and two licensed MMORPGs. Its in-house R&D team is currently developing six additional MMORPGs, as well as one casual game. A syndicate research report expects that KingsoftÆs domestic game segment will grow at a compound annual growth rate of 49% from 2006 to 2009, and its overseas game segment at 25%.
However, some observers argued that investors had to pay for this projected growth.
ôThe offering is a bit expensive,ö says the investor who attended the luncheon. ôIf you look at the 2007 price-to-earnings multiples of its US peers, they are much cheaper with proven track records.ö
The IPO price values the company at 35.9 times its 2007 earnings and at 14 times its 2008 earnings. This compares with US-listed Chinese peers Netease.com, which trades at a 2007 P/E multiple of 15 times and a 2008 multiple of 14 times, and Shanda Interactive Entertainment, which trades at multiples of 19 and 20 times for 2007 and 2008, respectively, after soaring 12.4% in the past two weeks. Perfect World is currently quoted at a 2008 P/E multiple of about 25 times, up from a valuation of 14.9 times at the IPO.
According to the syndicate report, Netease was ChinaÆs largest online game operator in 2006 with gross revenues of Rmb1.86 billion ($247.5 million). Shanda has the most diversified games portfolio among the major game operators with over 20 MMORPGs and casual games, both advanced and standard, on its platform.
Kingsoft ranked the fourth largest service provider in China measured by online gaming subscription revenue, and was one of the top 10 sellers of secure management products in Asia in 2005, according to IDC. It had 997 research and development personnel at the end of August.
The company expects its bottom line will increase 3% to at least Rmb102.6 million this year, after surging 26.3 times to Rmb99.11 million between 2004 and 2006. The syndicate report estimates KingsoftÆs net profit could more than double to reach Rmb258 million ($34.4 million) in 2008.
ôThe management are originally engineers, not businessmen. They spend a lot of money on R&D û they have one of the largest in-house entertainment and application software research teams in China,ö says the investor. ôYou can deduce on the one hand that their business approach could be costly, but on the other hand their products should be of good quality because they invest a lot in R&D. I would say their business approach is good for the long run.ö
Kingsoft is planning to spend around 30% of the proceeds on the expansion of its research and development capabilities, and reserve another 20% for strategic acquisitions and joint ventures. More than 40% of the funds will go towards the enhancement of IT infrastructure, expansion of overseas market as well as construction of R&D facilities in Zhuhai.
The trading debut is scheduled for October 9.
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