Kosmopolito becomes first hotel operator to list in HK since 2006

A spin-off from Hong Kong conglomerate Far East Consortium, the offering is multiple times covered by more than 75 institutional investors, according to sources.

Kosmopolito Hotels International, a Hong Kong-based hotel operator that is being spun off from local conglomerate Far East Consortium International, raised HK$1.18 billion ($153 million) ahead of its listing in Hong Kong on Monday. It is the first initial public offering by a hotel company on the Hong Kong stock exchange for nearly four years after Shanghai Jin Jiang Hotel’s popular $311 million IPO in December 2006.

Jin Jiang's public offering was more than 380 times subscribed by retail investors, which triggered a full clawback, and the stock soared 95% on its first trading day. Unlike Kosmopolito, Jin Jiang has all its operations in mainland China, but the good market response still reflected an interest among Hong Kong investors for hotels. And that appears to remain the case, despite the fact that the cut-throat competition for attractive sites and buildings among the city's hotel developers and operators is growing, pushing up the already staggeringly high property prices.

Kosmopolito's institutional offering received decent demand from a well-mixed group of investors, mostly Asia-based, including long-only accounts, hedge funds and private banking firms. The offering was multiple times covered by more than 75 institutional investors, according to a source.

The company also secured one cornerstone investor in the form of Chow Tai Fook, the investment vehicle of Hong Kong tycoon Cheng Yu-tung, which bought HK$100 million worth of shares.

Investors are interested in the company's good Ebitda (earnings before interest, tax, depreciation and amortisation) margin of 38.6% and high occupancy rate of 90%, which are both above the industry average, the source said.

Whether that interest is strong enough to also support a good trading debut remains to be seen. Trony Solar, which completed a $223 million Hong Kong IPO last week, saw dramatic ups and downs on its first trading day yesterday. The stock opened 30% above its HK$4.50 IPO price at HK$5.85, but then fell sharply and closed at just HK$5.07 -- 12.6% higher than the IPO price.

Kosmopolito sold 540 million shares at HK$2.20 apiece -- in the lower half of the indicated price range. Based on the projected earnings for the 2012 fiscal year (which ends in March 2012), the final price translated into a price-to-earnings ratio of 12 times. The shares were offered in a range between HK$2.04 and HK$2.75, which represented a P/E ratio of 11.6 to 13.6 times.

The company started operations in 1998 with one hotel consisting of 320 rooms and has since expanded its hotel room portfolio more than 10-fold. It currently owns and operates eight hotels in Hong Kong, five hotels in Malaysia and two hotels in China with a total of 3,889 rooms. It also has seven hotels at various stages of planning or development, including four in Hong Kong, two in China and one in Singapore, which will add another 2,406 rooms.

It will use the proceeds from the fundraising to expand its hotel portfolio and plans to increase its total room number to 6,700 by 2013.

Between March 31, 2010 and the end of 2012, Kosmopolito plans to add 1,443 new rooms to its Hong Kong hotel portfolio, which will account for 15.4% of all new rooms to be added in Hong Kong during this period, according to the Hong Kong Tourism Board.

Far East Consortium is well-known in the city for its expertise in snapping up bargain assets during economic downturns such as the 1997 Asian financial crisis and in 2003 when the acute respiratory disease Sars spread through Hong Kong and the property and stockmarkets crashed. Among the industrial and commercial properties that it has bought and subsequently converted into hotels is Xinhua News Agency's former office building in Hong Kong.

Kosmopolito made a HK$45.8 million ($5.8 million) profit in the 2010 fiscal year.

Credit Suisse, Morgan Stanley and Royal Bank of Scotland were joint bookrunners for the IPO.

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