Mixed outcome for HK IPOs suggests investors are becoming selective

Glorious Property prices in the bottom half for a $1.28 billion deal, while CR Cement raises $825 million after pricing at the top. In Korea, Tong Yang Life Insurance becomes the first life insurer to go public following a $286 million IPO.

The outcome was somewhat mixed for the latest two initial public offerings to price in Hong Kong at the end of last week, suggesting that investors are becoming a bit more selective about where they put their money. This shouldn't be surprising given the multitude of IPOs that are currently in the market and the long list of companies that are still hoping to list before the end of the year.

Also, the Hong Kong equity market -- like many others around the world -- was slightly weaker at the end of last week, with the Hang Seng Index falling 3.1% on Wednesday through Friday. Metallurgical Corporation of China also fell 11.65% in its debut on Thursday after completing the largest Hong Kong IPO year-to-date as part of a dual listing that also saw the company sell shares in China's domestic market. MCC's A-shares gained 35% in their debut last Monday, but have since been on a declining trend and finished their first week just 7.6% above the IPO price.

MCC's H-shares recovered marginally on Friday with a 1.25% gain to HK$5.68, but went into the weekend having lost 10.6% versus the IPO price of HK$6.35.

Sources say the disappointing debut prompted some institutional investors to put a limit on their orders for Glorious Property Holdings and China Resources Cement, which both closed their IPOs on Thursday. With regard to CR Cement, this basically meant that the investors priced themselves out of the deal since there were very few limit orders overall and the company still managed to price the offering at the top of the indicated range at HK$3.90.

For Glorious, however, the limit orders had a more pronounced impact with the deal pricing in the lower half of the range, at HK$4.40. The company had offered the shares in a range between HK$4.00 and HK$5.30.

Both deals were well covered by institutional and retail investors, however, and bankers say there are no signs the overall demand for Hong Kong IPOs is waning. However, if the secondary market remains soft, valuations may become more of an issue again.

Glorious Property Holdings

Glorious, which was the largest of the two deals that priced on Friday, raised HK$9.9 billion ($1.28 billion) from its IPO, which comprised 25% of the company or 2.25 billion shares. Of the total, 83.3% were new shares, while 375 million shares were sold by founding chairman Zhang Zhirong, who owned 99.3% of the company before the IPO. A 15% greenshoe may increase the total deal size to as much as $1.47 billion.

There was no specific information available on the level of demand, although a source confirmed over the weekend that retail investors subscribed to more than 50 times the number of shares earmarked for them. This means there was a full clawback that increased the size of the retail offering to 27.5% from 7.5%.

As reported earlier, another $130 million worth of shares, or 10.2% of the deal, went to four cornerstone investors, a couple of which already have ties to the Shanghai-based developer through notes and loans. This left just under $800 million to be divided among other institutional investors. The four cornerstones were Shanghai Industrial Holdings, which bought $50 million worth of shares, Nan Fung Group and fellow-Chinese developer Sino-Ocean Land, which each took $30 million, and China Southern Fund Management, which bought $20 million worth.

Glorious, which was brought to market by Deutsche Bank, J.P. Morgan and UBS, will be the first pure-play Chinese real estate developer to list in Hong Kong in more than a year, and a "first-mover" with regard to a pipeline that is estimated to hold as many as 10 other Chinese developers at various stages of preparation for a Hong Kong listing over the next few months. It is also one of the largest among the known listing candidates, which meant most investors were at least taking a look at the deal.

While it is certainly possible that some investors still have concerns about the sector following a significant slump in prices and sales volume last year, syndicate analysts have argued that Glorious is in a good position to benefit from a pickup in the economy and China's housing market given its mix of projects both in tier-1 markets -- mainly Shanghai, Tianjin and Beijing -- and fast-growing tier-2 cities. Much of the land bank has been acquired at low cost, meaning it is boasting wide margins due to land price appreciation.

Glorious focuses on mid- to high-end residential and commercial properties, including apartments, townhouses, retail properties and hotels, and has one of the largest land banks among the Chinese developers listed in Hong Kong at 13.6 million square metres, split roughly 40-60 between tier-1 and tier-2 cities and with 20% in Shanghai alone -- another positive in light of the upcoming World Expo to be held here in 2010.

The IPO price values Glorious at 10.4 times its projected earnings for 2010. This puts it at a discount to all four of its key comparables, including Sino-Ocean Land, Yanlord Land and Shui On Land, which trade at between 13.4 and 14.8 times next year's earnings, and Shimao Property Holdings, which is also based in Shanghai and is quoted at 11.6 times.

China Resources Cement

CR Cement, on the other hand, priced at a premium to its peers of equal or smaller size, which analysts and bankers agreed was somewhat "punchy" but say was still warranted because of the company's strong market position, a backing by the well-known China Resources group, and better profitability. And deeming from the fact that virtually all of Hong Kong's major tycoons and corporates placed orders, it seems investors agreed with that assessment.

The IPO price of HK$3.90 allowed CR Cement to raise HK$6.39 billion ($825 million) and values it at 15.3 times its projected 2010 earnings, while Shanshui Cement and China National Building Material trade at 10.2 and 13.9 times respectively. However, CR Cement is coming at a discount to sector leader Anhui Conch Cement, which is currently quoted at 19 times next year's earnings.

According to sources, the institutional tranche, which initially accounted for 80% of the offering, was 20-25 times covered and attracted "hundreds" of investors. The 10% retail tranche was 80 times subscribed which prompted a partial clawback that boosted this tranche to 40%. Another 10% of the deal was set aside for a stock option programme.  

CR Cement is the largest cement and clinker producer in Southern China and the country's second largest producer of concrete. It sold 25.5% of its enlarged share capital, or 1.638 billion new shares.

CR Cement was brought to market by Credit Suisse and Morgan Stanley and is set to start trading on October 6. Glorious will debut a few days earlier on October 2.

Tong Yang Life Insurance

Meanwhile, in Korea, the first of the country's life insurance companies to go public, Tong Yang Life Insurance, has priced its IPO at W17,000 per share for a total deal size of W340.4 billion ($286 million). The final price was at the bottom of the price guidance ranging from W17,000 to W22,000, although -- as is typical for Korean IPOs -- that range was set before the bookrunners had received any feedback from investors and it fairly quickly emerged that it would be difficult to price anywhere but the bottom.

The IPO price values the company at about 2 times its price-to-book value, on a post-money basis and a price-to-enterprise value ratio of 1.25 times. This gives it a slight discount to the other major Korean life insurers, which trade at a P/B multiple of 2.2 times and at a price/EV value of 1.75 times.

The company offered 20.022 million shares, of which about 54% were new. Of the total, 40% went to international investors, 20% to domestic institutions and 20% to the employee stock option programme. The remaining 20% will be sold to retail investors today and tomorrow, in an offering fully underwritten by Daiwa SMBC.

Tong Yang, which is the sixth largest life insurer in Korea, was brought to market by Credit Suisse, Daiwa SMBC and Morgan Stanley. It will start trading on October 8. 

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