Little Sheep sets IPO price at the mid-point

Strong interest from retail investors helps the Chinese restaurant chain raise $100 million and triggers the first clawback on a Hong Kong IPO in three months.
China's largest restaurant chain, Little Sheep, attracted strong demand for its initial public offering and has set the price at the middle of the range at HK$3.18 per share for a total deal size of HK$779.1 million ($100 million). Over the past few months, most IPOs have been pricing at or near the bottom of the range, making this deal something of a hit.

A source close to the offering says interest was so strong that if the price had been set at the top of the indicated range of HK$2.68 to HK$3.68, not much would have been lost. The reason it priced in the middle, he says, is that given the amount of publicity that the listing has received in the past few weeks û in the form of advertising and media coverage û it is important that it trades up when it comes to market. A mid-point pricing helps ensure this will happen.

The deal was well covered with the institutional tranche attracting orders for 17 times the amount of shares available (pre-clawback) and the retail tranche 72 times covered û enough to force a partial clawback that increased the allotment to retail investors to 40% from 10%. This is the first time retail investors have shown enough interest to invoke a clawback since China Railway Construction's IPO in early March and makes for a welcome break from the muted response to other recent deals. Of the seven Hong Kong listing candidates that have completed roadshows since the beginning of May, four failed to attract enough demand to cover their retail tranches even once. Two of those deals were cancelled altogether, including Wah Kwong Maritime Transport Holdings, which said last night that it would not proceed with its listing plans.

A variety of factors made Little Sheep attractive to retail investors, says the source: being a Mongolian hotpot restaurant, it has a simple business model that people can understand, and it is a famous Chinese brand that many investors will have used. ôThey are almost proud of buying it!ö he adds.

The range of institutional investors in the book was described as ôthe mix of investors that you'd dream to have in a dealö. Across all regions û Asia, Europe and the US û there was a balance of long-only investors and hedge funds. There was also strong interest from the Middle East, which one source explained as being due to the company's primary ingredient being lamb û a staple meat in the region.

With most recent IPOs having priced at the low end, Little Sheep's mid-point pricing makes the deal stand out. The source says this is beneficial for sentiment as it shows that a company with a good story and management can succeed in a difficult market. However, even if it trades up û which it is likely to do if investors try to add to their scaled-back IPO allocations û the problem is that with a deal size of only $115 million (including the greenshoe), it is not going to make up for the losses that people may have been taking on other recent IPOs.

The company sold 24% of its enlarged share capital in the form of 245 million shares, of which 71% were primary. The deal includes a 15% greenshoe, which could boost the total proceeds to as much as $115 million if fully exercised. The final price values the company at 21.7 times its projected 2008 earnings. The joint bookrunners were Deutsche Bank and Merrill Lynch.

Established in 1999, Little Sheep is a major Chinese food brand. The popularity of its Mongolian hotpot restaurants has made it the market leader in the full-service restaurant sector. As of March this year, it had 350 outlets û 103 were directly owned, the rest franchised û and it plans to open another 150 restaurants by 2010.
¬ Haymarket Media Limited. All rights reserved.
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