Legend embarks on pre-IPO roadshow

The Chinese conglomerate's Hong Kong float comes as markets adjust to the MSCI's decision not to include A-shares and a flood of retail investors open accounts.

Legend Holdings, the largest shareholder of personal-computer maker Lenovo Group, formerly kicks off roadshows on June 15 ahead of its Hong Kong initial public offering.

Beijing-based Legend, an infrastructure group focused on IT, financial services and agriculture, is aiming to raise up to $2.25 billion, although the deal has been launched into a market that is still absorbing news that US index provider MSCI will delay the inclusion of A-shares on its emerging market indices. The news sent the Shanghai Stock Exchange Composite Index down 0.50% up to June 10, although it has since recovered 1.2% up to June 12.

The formal price range for Legend's IPO was set on Friday afternoon, with some 352.9 million shares on offer between HK$39.80 and HK$43 per share. All of the shares are primary and represent about 15% of the company’s total outstanding capital, according to a source close to the deal. There is a traditional 15% greenshoe option.

On a post-shoe basis, the HK$39.80 to HK$43 per share price range puts the company’s valuation at 13.2 to 14.3 times 2015 earnings, according to a consensus syndicate forecast. The price-to-book ratio meanwhile is 1.4 to 1.5 times.

Depending on where shares price, Legend could raise between $1.08 billion to $2.25 billion from its Hong Kong listing. On an NAV basis, this represents a 23.4% discount at the low end and a 18.1% discount at the high end.

At the top of the range, Legend has a market capitalisation of $16 billion.

UBS and CICC are the joint bookrunners on the deal.

Flurry of activity
Legend is the latest Chinese company to seek to apply for a Hong Kong IPO this year, following the lead of several mainland banks, brokerages and insurers.

GF Securities, China’s fourth largest broker, raised $4.1 billion in its Hong Kong debut in March, with shares surging 25.2% since. Huatai Securities meanwhile raised $4.5 billion after selling shares at the top of its range at the end of May. Shares have risen 2.7%.

Both deals were tremendously well received — GF Securities’ retail tranche was oversubscribed by 180 times by 10 million investors, while Huatai’s listing received demand from roughly 800 institutional lines, remarkable given the book had been fully covered on the roadshow.

Surging stock markets have boosted brokers’ business, as retail investors flood to open up accounts. Average daily turnover totalled Rmb1.4 trillion ($225.9 billion) in April. And investors opened 13.6 million new retail brokerage accounts in April, easily surpassing the previous record of 5.1 million in June 2007, according to research by BOC International.

However, recent volatility in local markets has led some to question whether the bull market is experiencing a temporary pullback or has run its course. Since peaking on April 28, Hong Kong’s Hang Seng Index has fallen 4.1%. The recent volatility experienced on the Shanghai Stock Exchange Composite Index meanwhile occurs amid new fears that new share issuance will lead to money being pulled by existing equities.

In addition, sentiment towards A-shares has soured after MSCI announced that it will not yet include A-shares in its emerging markets indices. The firm said that despite the wave of reforms introduced to open up China’s markets last year, three key accessibility hurdles remain — the quota allocation process; capital mobility restrictions; and beneficial ownership.

Indeed, the source noted that these recent events have had an impact on sentiment leading up to Legend’s IPO. “Concerns [over volatility] is a factor for some investors," the source told FinanceAsia. "But the anchor book is already covered.” The deal has already attracted between $800 to $1 billion worth of demand from cornerstone investors, mainly Chinese firms, he said, noting it is important to ensure less than half the deal is covered by cornerstones to enable enough liquidity in the secondary markets.

Prospective investors are comparing the company to Fosun International, another Chinese business conglomerate with a market cap of $20 billion. At the moment, Fosun’s trading at 13.98 times its estimated 2015 earnings, so Legend Holdings is being pitched at a very slight discount to Fosun.

Year-to-date, Fosun’s shares have surged 103.3%.

Fosun has become one of the most prolific cross-border dealmakers in China, spending more than $8 billion in the past two years. Last year was particularly fruitful for the group. In 2014, Fosun purchased a 23% stake in German tailor Tom Tailor and a 20% stake in US insurer Ironshore for $463 million.

The Ironshore acquisition led to some pressure on its credit ratings, prompting both Moody’s and Standard & Poor’s to flag the need for equity rather than debt to fund its latest purchase. Fosun responded with an accelerated top-up placement which raised $1.2 billion, representing 6.22% of its enlarged share capital.

As Fosun continues to search for cross-border opportunities, Legend plans to use proceeds from the IPO to fund strategic investments in industries with high growth potential, such as consumer and service-related sectors. It will also use some proceeds to pay back Rmb2 billion ($322.3 million) in corporate bonds due in October.

Legend was formed in 1984 by the Chinese Academy of Sciences, a state-linked research body under the State Council, which maintains a controlling 36% stake in the company as of December 31. Legend’s employees own 32.9% through two companies, while Hong Kong-listed investment conglomerate China Oceanwide owns 20%.

Legend owns a 30.6% stake in Lenovo Group, the largest personal computer maker by shipments, which acquired IBM in 2005. It also owns private equity firm Hony Capital and venture capital firm Legend Capital.

It divides its company up into six segments — IT, financial services, modern services, agriculture and food, property and chemicals, and energy materials.

Legend’s profits increased to Rmb7.82 trillion in 2014, up from Rmb7.71 trillion in 2013 and Rmb4.46 trillion in 2012, according to the company’s latest exchange filing.

¬ Haymarket Media Limited. All rights reserved.
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