More HK IPOs cancelled, but new offers keep coming

Seven small and mid-cap listing candidates published their retail prospectuses last week, as the deadline for using 2010 accounts overshadowed the continued volatility in the local equity market.
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Sun Art chief executive Bruno Mercier speaks via a video link to promote the company's IPO (AFP)
<div style="text-align: left;"> Sun Art chief executive Bruno Mercier speaks via a video link to promote the company's IPO (AFP) </div>

Another two Hong Kong IPOs were called off on Thursday last week, bringing the total number of aborted deals in June to six. And that’s not counting those that chose not to launch after completing investor education.

Beijing Jingneng Clean Energy Group, which had been seeking to raise up to HK$4.9 billion ($630 million), and CT Environmental Group, which was targeting up to $90 million, both citied market conditions as the reason for pulling their deals. CT Environmental specifically referred to the continued market volatility and said the decision was made with “the investors’ best interests in mind”.

Even so, eight other listing candidates have approached investors during the past 10 days, in the hope that the slight improvement in the secondary market will work in their favour. The Hang Seng Index has finished flat or higher in four of that past five sessions as concerns about inflation in China have eased and after Greece approved an austerity bill that increases its chances of getting the next loan instalment from the EU and the IMF, and therefore reduces the risk of a default — for now.

Things have been looking up on the IPO front as well. Hypermarket operator Sun Art Retail Group, which is trying to raise up to $1.06 billion and kicked off its roadshow last Tuesday, is already multiple times subscribed, according to sources. Meanwhile, Prada has gained a total of 18.9% since its June 24 debut and Tibet 5100 Water Resources Holdings jumped 23% when it started trading last Thursday — suggesting investors are becoming interested in market newcomers again. (The Hong Kong market was closed on Friday to celebrate the anniversary of the handover to China).

But the real reason why these other companies chose to kick off their offerings was more likely the fact that they needed get their deals on the road before the end of June — or face a delay of a couple of months at least. As per Hong Kong listing requirements, financial accounts included in the prospectus cannot be older than six months, which means companies using December 2010 accounts had to publish the retail prospectus by June 30 at the latest. If they didn’t they will need to get their accounts updated and audited before trying again. Indeed, two of the companies published their prospectuses last week, but won’t actually open their retail subscriptions until this week.

Aside from Sun Art Retail, most of these IPOs are quite small. In fact, five of them are raising well below $100 million and, excluding Sun Art Retail, the other seven listing candidates are only looking to raise a combined $548 million. This could pose an extra challenge, since investors have shown they are less keen to put their money to work in small deals that may end up being illiquid once they start trading.

That doesn’t mean there aren’t exceptions. The massive demand for second-hand designer handbag seller Milan Station’s $35 million IPO will still be fresh in most investors’ minds. And, on Thursday, Shuanghua Holdings, an independent supplier of heating, ventilation and cooling components for cars, rallied 25.9% in its debut after raising $24 million. Still, the small size of most of these deals and the fact that there are so many of them in the market at the same time, suggests they are in for a challenge.

The biggest of the lot is Zall Development (Cayman) Holding, a Wuhan-based operator of large-scale shopping malls focusing on wholesale buyers. It is aiming to raise up to $241 million with the help of BNP Paribas, Bocom International and GF Securities. The company kicked off its institutional roadshow on Wednesday and opened its retail books on Thursday.

It is offering 525 million shares, or 15% of the share capital, at a price between HK$2.89 and HK$3.57. According to a source, the price translates into a 50% to 58% discount versus its net asset value. The deal will wrap up on Wednesday (July 6) with the final price set to be fixed later that day.

Also in the market are:

  • Prince Frog International, a brand of childcare products such as shampoos and moisturizers, which is aiming to raise up to $145 million. The deal is led by CCB International and will close on Wednesday.
  • Shunfeng Photovoltaic International, a manufacturer of high-performance solar cells that is planning to establish a presence throughout the solar product value chain, from silicon wafers to solar modules. It is aiming to raise up to $71 million with the help of joint bookrunners CMB International and Daiwa Capital Markets. This deal too closes on Wednesday.
  • Winox Holdings, an OEM manufacturer of stainless steel products such as watch bracelets, costume jewellery and accessories. It is aiming to raise up to $46 million and started its institutional roadshow on June 27. The retail offering will open on Friday. The deal is arranged by Haitong International Securities.
  • Golden Shield Holdings (Industrial), a producer of cotton yarn and grey fabric that was seeking up to $22 million. The offering is led by Guotai Junan and will close on Wednesday.
  • 1010 Printing Group, a provider of printing services to international book publishers and print media companies. It is aiming to raise up to $15 million and, according to the prospectus that was published last week, it will start accepting retail subscriptions on July 12. There was no information about when it will open the institutional books. Investec and Haitong International Securities are joint bookrunners.
  • China Print Power Group, another printing company focusing on books and specialty products such as stationery. This one is really small, seeking to raise just $8 million. The deal will close today and is arranged by Yuanta Securities and VC Capital.

Some companies chose not to get rushed, however, and decided to hold off on the listing in the hope that the market will continue to improve. One example is China Hanking Holdings, an iron ore miner in Liaoning province, which was hoping to raise about $230 million. The company was expected to launch both the institutional bookbuilding and the retail offering last Thursday, but cancelled the deal at the last minute. Sources say Hanking and its bookrunners — BNP Paribas, Credit Suisse and Deutsche Bank — were not able to agree on a valuation range, but officially this company too blamed the market environment.

Whatever the reason, observers say waiting may well be the right choice, unless the company needs money straight away. Global equity markets are expected to improve in the second half and investor interest should pick up if more of the deals they bought in the first part of the year start to yield some returns.

Sources said Beijing Jingneng’s IPO never gained much momentum since the secondary market wasn’t particularly supportive when it launched a couple of weeks ago. And it made little difference that the market improved towards the end of the bookbuilding since by then investors had moved on to look at other deals that did have momentum, such as Sun Art. It also didn’t help that there are still uncertainties related to the subsidies for wind power energy in China. Beijing Jingneng was the largest provider of gas-fired power in Beijing and the eighth largest provider of wind power in China as of the end of last year. It currently derives about 70% of its revenues from gas-fired power and 30% from wind power, but is in the process of expanding its wind power assets.

The deal is said to have been fully covered, but even if that was the case, the company and the bookrunners may have feared that a number of the investors would sell again if the market turned against them. And, with the seven-day delay between the pricing of a Hong Kong IPO and the listing, it is difficult to judge where the market will be by the time the shares start trading. The same after-market concerns were also cited by people close to some of the other Hong Kong deals that were pulled in June.

Beijing Jingneng’s IPO was arranged by Barclays Capital, which is also an existing shareholder in the company, BOC International, Goldman Sachs, Macquarie and UBS.

CT Environmental, which provides industrial water supply services and wastewater treatment, was being brought to market by Citi.

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