Mixed Chinese debuts in the US

Advertising firm AirMedia looks to the sky, while agricultural solutions play Agria stays close to the ground after completing their IPOs. Focus Media prices follow-on.
The latest two Chinese companies to list in the US saw a mixed response when they started trading last night. Screen-based advertiser AirMedia Group followed the recent trend with a gain of close to 40%, while agricultural solutions firm Agria Corp tumbled more than 25%.

The two firms, which raised a combined $508 million, completed their transactions after the US market closed on Tuesday. On the same night, Focus Media priced a combined follow-on and sell-down offering of $888.4 million, bringing the total amount of cash raised by Chinese firms in this single session to $1.4 billion.

Even with that amount of paper available, bankers say there are no signs that the appetite for high-growth Chinese companies is waning. In fact, the interest seems to be increasing as the recent newcomers continue to perform strongly in the secondary market and the pool of investors coming into these deals seems to be increasing. Routinely, there are now several hundred names participating on most initial public offerings by Chinese companies.

Agria too saw solid demand for its IPO and priced at the top of the range, but the interest was less wide-spread than for most of the other recent newcomers as clearly indicated by the drop in the secondary market. Observers say this was likely to do with the fact that most investors were unfamiliar with its business, which focuses on research, development and production of upstream agricultural products. Its three main business lines are corn seeds, seedlings and sheep breeding products, including frozen sheep semen, sheep embryos and breeder sheep. There were also no direct comparables to relate to, which meant it required a bit more effort to understand and value.

Many of the other Chinese firms that have debuted in the US in recent weeks have operated within industries that US and European investors were already familiar with from their home markets, and have come with promises of much higher growth rates than what similar companies in the West are able to deliver because of their much more mature markets.

AirMedia was another example of this and this company also had the added benefit of operating in the same industry as Focus Media, which has been listed in the US since July 2005 and is a well-liked stock that has been delivering strong returns to its investors. The fact that both companies were in the market at the same time, may have seemed unfortunate for AirMedia at first, but the positive response to Focus MediaÆs offering û the stock gained 4.3% during the roadshow and 15%, or $8.55 since the initial filing on October 19 û was in fact helpful. For one it gave the bookrunners the confidence to lift the initial price range by $3 to $12-14 from $9-11 û an unusually large increase even in the US where price ranges are often adjusted during the bookbuilding to better reflect the level of demand.

Even with the higher price range, sources say AirMedia attracted more than 450 investors. It was also more than 25 times covered despite the fact that individual orders were capped at 10% of the base deal size. The final price was fixed $1 above the new price range at $15 for a total deal size of $225 million.

The share price rose as much as 51.4% to a high of $22.71 in early trading on Nasdaq, but then retreated slightly and hovered in a range between $20 and $21 more most of the session. It closed at $20.90, or 39.3% above the IPO price.

A key draw for investors was the companyÆs focus on providing advertising screens at ChinaÆs major airports and to the countryÆs three largest airlines. It currently operates more than 95% of the digital TV screens that display ads at ChinaÆs 15 largest airports, operating more than 2,000 screens at the actual airports. It also places its programmes on over 16,000 screens on airplanes. It recently obtained the exclusive rights to provide 320 screens and 440 digital frames at Beijing airportÆs new Terminal 3.

AirMedia sold 23% of the company through 15 million American depositary receipts, of which 11.75 million were new. The deal includes a 15% greenshoe that could boost the total proceeds to $258.8 million. Lehman Brothers and Morgan Stanley were the joint bookrunners.

Agria, which is a play on food inflation as well as a direct link to the China growth story, saw strong enough demand to fix the price at the top of the original price range of $14.50 to $16.50, but sources say investors had indicated they werenÆt keen on seeing the deal price any higher than that.

ôItÆs an unproven business in some areas and many investors would want more of a track record before they accept a higher valuation,ö notes one source. ôIt is also business with very high margins and people are wondering whether that will be sustainable.ö

At a final price of $16.50 Agria raised $283 million and was valued at a 2008 price-to-earnings ratio of about 20 times, which puts it just ahead of fellow Chinese firm Origin Agritech, which specialises in crop seeds. Also listed in the US, Origin trades at about 18 times. However, both these companies trade at significant discounts to the large global firms such as Monsanto, an agricultural biotechnology company that is the worldÆs leading producer of genetically engineered seed, which trade at P/E multiples in the high 20s.

The majority of the deal was taken up by US investors, while about 25%-30% went to Asia. Demand from corporate, high net-worth individuals and private banking clients was quite noticeable, according to the source. There was no information on the subscription ratio, but it was believed to have been well into the double digits. However, that would suggest there should have been enough buyers to support the stock in the secondary market.

The stock opened 3% higher at $17, but then failed to push on and instead assumed a steadily declining trend that eventually saw it close at $12.06. This represented a 26.9% drop from the IPO price, which according to Dealogic is the worst trading debut by a Chinese stock in the US on record. Agria is listed on the New York Stock Exchange.

The company sold 17.15 million ADS, or 27.1% of the company. About 70% of the shares were new. There is a 15% greenshoe that could boost the total deal size to $325.4 million if the share price recovers from the first day slump and allows it to be exercised. Credit Suisse was the sole bookrunner for the offering.

Meanwhile, Focus Media saw the largest round of sell-downs by its existing share holders since its listing, exceeding the $529 million raised from the latest offering in January (based on the pre-shoe amount). However, each transaction include roughly the same number of underlying shares, which means the increase in the deal size is purely a reflection of the higher share price. The total deal comprised 10.7% of the outstanding share capital.

Despite the gains in the share price during the four-day bookbuilding, the offering saw good demand and the deal was priced at $64.75, which represented a tight 0.5% discount to TuesdayÆs close of $65.10. The two previous sell-downs of Focus Media stock were both priced at a 0.9% discount. The book ended up more than two times covered based on the post-greenshoe deal size, according to one source. The shoe accounts for 15% of the base deal and could boost the total proceeds to $1.02 billion.

More than 120 accounts came into the book, including a lot of existing shareholders who didnÆt want their stakes to be diluted. Given the continued strength in the share price investors also appear to be pleased with Focus MediaÆs aggressive acquisition strategy and the execution of it.

ôThe company has proven to be a good industry consolidator,ö notes one observer.

The share price has almost doubled so far this year (+96%) and is up 666% since its IPO two years ago. The stock did fall 1.6% to $64.05 overnight following the sell-down, but the decline came in a generally weak market that saw the Dow Jones index drop 2.6%. The Nasdaq Composite index lost 2.7%.

The majority of the 13.72 million ADSs on offer through the base deal are backed by existing shares, while the greenshoe is made up of all new shares. Over 80% of the 8.72 million existing ADSs were sold by Total Team, which is owned by 14 different shareholders, including company president Zhi Tan. Total Team will hold no shares in Focus Media after this deal. The rest of the shares came from a wide group of shareholders who each own less than 1% of the company. Each ADS accounts for five common share following an adjustment to the ADS ratio earlier this year.

The deal was led by Citi, Credit Suisse and Merrill Lynch. Somewhat surprisingly, Goldman Sachs, which joined these three as a bookrunner on the January sale and was the sole arranger of Focus MediaÆs IPO, was missing from the lineup.

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