MTR Corp unveils IPO

The Hong Kong government chose the palatial setting of the former Governor''s residence to launch the Territory''s first privatization through a public offering yesterday (Monday).
Hong Kong's great and good toasted the launch of the offering with champagne, while the huge assembled press, cordoned off behind red ropes, heard how the government wants to make the Hong Kong public individual stakeholders in the railway corporation. Describing the MTR as one of the world's few profitable mass transit systems, Finance Secretary Donald Tsang said that a 20% sell-down might bring "further improvements in efficiency, productivity and flexibility", which is "what Hong Kong's all about".

Concluding that privatization will allow investors to own, "a part of the very fabric of Hong Kong and its future", Tsang outlined a series of incentives that will tilt the HK$8 billion ($1.03 billion) to HK$9.38 billion ($1.21 billion) offering heavily in favour of the Hong Kong general public. Hence, in contrast to the standard 10% minimum placement to retail, bankers say that this time round there will be a 20% threshold.

To bring total participation up past the government's target 50% mark, the offering will also comprise easier oversubscription triggers, allowing the global co-ordinators to claw back shares from the institutional tranche. The exact levels have not yet been finalised, however.

Similar to the Tracker Fund, where two thirds of a HK$33 billion offering was allocated to retail last November, MTR Corp will offer the same level of loyalty bonuses and IPO discounts. Consequently, retail investors will receive shares at a 5.25% discount to the institutional price, which is being pre-marketed on an indicative range of HK$8 to HK$9.38 per share. To discourage immediate secondary market churn, investors will also receive loyalty bonuses if they hold onto their shares. This will entail one extra share for every 20 held for one year and one extra share for every 15 held for two.

MTR privatisationLed by global co-ordinators Goldman Sachs, HSBC and UBS Warburg, the overall deal will comprise a 1 billion share offering representing a 20% stake in the company, rising to 23% should a 15% greenshoe be exercised. At the pre-marketed ranges, shares are being offering on a price/earnings ratio of 4.5 to 5 five times 2001 earnings and 10 to 11 times 2002 earnings.

As a discount to Net Asset Value (NAV), bankers add that this equates to a discount of 14.53% at the bottom end of the range, rising to NAV flat should shares price at HK$9.38. On an ebitda basis, this represents a range of 3.6 to 4.3 times 2001 prospective earnings and 19.7 to 23.1 times 2002 earnings. The company has a book value of HK$47.7 billion and a net tangible asset value of HK$78.9 billion.

The discounts are far less steep than some market participants were predicting, particularly at a time when Hong Kong's property sector is averaging a 25% to 30% discount to NAV. However, bankers have consistently argued that MTR Corp deserves to trade at a premium because it does not undertake any of the development risks of its property portfolio and has the railway operations underpinning its core earnings base.

Prospective dividend yields are also far more attractive than initially forecast. Bankers says that the transaction is likely to be competitive with bank deposits, currently yielding 4.75%, and will be sustantially higher than the property sector average. Henderson Land, for example, is presently yielding 3% and Cheung Kong 1.44%.

Roadshows for the deal will start on Thursday, with retail and institutional books opening on September 25 for final pricing on September 28. The maximum offer price for the Hong Kong IPO will be announced on Sunday September 24, with final listing to take place on October 5.

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