The Hong Kong government and global co-ordinators Goldman Sachs, HSBC and UBS Warburg have been presented with an allocation nightmare this weekend, as they try to divide up a roughly $16 billion order book for a $1.21 billion deal, at the top end of its indicative range.
Observers report that the institutional order book has closed around the $10 billion level, representing a roughly 10 times oversubscription level to the $964 billion worth of shares, initially be available should pricing come at the top of the range under an 80%/20% institutional/retail split.
Where the domestic book is concerned, bankers report that roughly 600,000 completed applications had been counted late on Thursday evening. Bankers further comment that retail investors have placed slightly higher orders than they did for TraHK last November, which attracted an average order size of HK$80,000. On this basis, books will close at least 26 times oversubscribed and potentially up to 30 times.
Though a far cry from the record 1,276 oversubscription retail multiple attained by Beijing Enterprises in May 1997 and 669 times level by tom.com earlier this year, the Hong Kong government has nevertheless scored a notable achievement. The figure is also all the more impressive in light of the fact that the company will be offering at least 200 million shares to the general public, compared to an initial allocation of only 15 million by Beijing Enterprises and 42.8 million by tom.com.
In deciding how to split the book, the government has started with a 20% retail threshold and will implement easier clawback triggers to ensure that up to half the offering goes to the general public. Clawbacks were first instituted in 1997 after the carnage created by Beijing Enterprises huge oversubscription levels. Typically, a Hong Kong IPO will have a 10% retail threshold, with a first trigger increasing the amount to 30% should books close 15 to 50 times oversubscribed and a second trigger to 40%, should they close 50 to 100 times oversubscribed.
Adding to the government's headache, Hong Kong's corporate investors have also been strong supporters of the deal and will expect to be rewarded as such. Tycoon Li Ka-shing and his group Cheung Kong, for example, have already publicly announced a combined order worth $400 million, while Sun Hung Kai Properties says it has bid for $100 million.
"Corporate investors can apply for the placement or subscription tranche and given the political angle, it will be very interesting to watch how they get treated," one banker comments. "Above all else, the government wants and needs this transaction to be a roaring success. It needs to improve its standing with the public and cannot afford to let anything go wrong."
Under a HK$8 to HK$9.38 price range, the government is offering a 20% stake in the company (23% with greenshoe), on a price/earnings ratio of 4.5 to 5 times 2001 earnings and 10 to 11 times 2002 earnings. As a discount to Net Asset Value (NAV), this equates to a discount of 14.53% at the bottom end of the range to NAV flat at the top. On an EBITDA basis, it represents a range of 3.6 to 4.3 times 2001 earnings and 19.7 to 23.1 times 2002 earnings.
Similar to TraHK, retail investors will receive shares at a 5.25% discount to the institutional price and to discourage secondary market churn, will also receive loyalty bonuses if they hold onto their shares. These amount to one extra share for every 20 held at the end of the first year and one extra share for every 15 held at the end of the second year.
For international fund managers, one of the chief attractions of the stock is that it seems like a safe haven in a volatile global market where tech and telecom stocks have lost favour.
Says Margaret Gadow of Gartmore Investment Management in London, "This is not an obvious bull story, but it certainly seems to have caught the imagination of both institutional investors and the Hong Kong public. We like it because it is a growth utility in the sense that it is continuing to expand its network. We also like the fact that it has consistent earnings from its property operations that few other portfolios can claim. In the current market environment, there are a lot more stocks with more volatile or cyclical earnings.
A second fund manager requesting anonymity adds, "We think the valuation levels are very fair and categorise the company as a defensive play, even on the property side. MTR Corp takes far lower levels of development risk than other property companies."
The fact that the company operates a rail network, but derives virtually all of its income from property appears to phase few. "One investor gave an interesting spin when he said that he viewed the company like a fixed income instrument with variable coupons," one banker recalls. "The train operations offer a steady dividend stream, while lumpier property income gives a variable kick to the company's NAV."
And Gadow adds, "MTR Corp is a strange hybrid of property and train company, but that doesn't mean to say the two don't fit together. The company owns the land around its stations and this makes for interesting sites which are also good for earnings."
"A property development built around a station means that three will always be flow through from customers who use the trains," she continues. "An added bonus is that the consumer retail environment in Hong Kong is improving, so it's a good time to be looking at retail property."
Bankers also conclude that for many international investors, Hong Kong's political landscape played a major role in their investment decision. "It was something that had to be factored into the equation and there were numerous questions during roadshows about how much respective power the Executive and Legislature had relative to each other and the Chinese government," one observer notes.
"However, even those investors with doubts came in right at the end, when it became obvious that the company is likely to be an MSCI constituent stock," he adds.
Overall, the global book is said to have little price sensitivity, with large cutbacks from the institutional tranche almost certain to guarantee that the stock rises when it opens trading on October 5. Final pricing will be decided this Sunday for publication on Tuesday October 3.