New Century delivers new year's first Hong Kong IPO

Pricing of Chinese paediatric hospital operator's deal indicates 2017 could again see sheer weight of onshore demand keep IPO valuations above levels offshore investors believe the fundamentals warrant.

Paediatric hospital operator, New Century Healthcare, priced its 138 million share initial public offering bang on the mid-point of its indicative range on Thursday, raising HK$1,015.68 ($131 million) on a post-shoe basis. 

The healthcare company is likely to be very happy with a HK$7.36 issue price given it has achieved a post shoe valuation of 28 times 2017 forecast earnings. 

This is equal to or higher than its immediate Hong Kong-listed comparables such as Harmonicare, Wenzhou Kangning and China Resources Phoenix Healthcare, which are trading around the 26 to 28 times level. 

Like so many Hong Kong flotations of recent years, New Century Healthcare has been able to dispense with an IPO discount because it could lock in enough less price-sensitive cornerstone and onshore corporate and institutional demand.  

Three cornerstones took $72 million of the overall deal, while a further five corporate-type investors accounted for 50% of the rest of the institutional tranche, or $15 million. This left $15 million for other institutional investors and about $11 million for retail investors.

While the overall transaction is not large ($113.9 million pre-shoe) it has set the tone for 2017, which may turn out to be a repeat of 2016 unless enhanced global volatility pressurises issuers to adopt a more accommodating pricing stance.

Bankers said New Century’s institutional tranche closed about three to four times covered at the bottom end of the range and about twice covered at the mid point.

The Hong Kong public offer closed 1.2 times covered. Retail investors' lack of enthusiasm is not that surprising given the performance of the last healthcare operator to list in Hong Kong, Harmonicare Medical Holdings.

The private obstetrics and gynaecology group priced its IPO at the top end of the range in July 2015 on the back of a retail order book that closed nine times covered. The stock closed on Thursday at HK$4.56 compared to an IPO price of HK$7.55. 

However, in recent days New Century's flotation appears to have given the sector a little bit of steam. Harmonicare was up 1.82% on Tuesday, following a 1.79% uptick on Wednesday. Year-to-date, it has risen 11.28% and 34.31% on a one-year basis. 

Phoenix Healthare had an even stronger day on Thursday, rising 4.31% to HK$10.64 and is now up 56.24% on a one-year basis.

Its current run reverses a downtrend since early September when investors began to worry about the impact of changing government regulations particularly on operators with links to public hospitals, which will no longer be able to add a 15% mark up to drugs.

Wenzhou Kangning was also up on Thursday, but by a lesser 0.28%. All three outperformed the broader Hong Kong market, which had a down day.

Bankers said investors also liked New Century's strategy. Syndicate analysts are forecasting 35% to 40% compound annual revenue growth over the next few years.

They added that while net income has been stagnant, the company has reached an inflexion point. Here, syndicate analysts predict an earnings growth CAGR of 15% to 20% over the next couple of years. 

This is being driven by the government's move out of the hospital sector, making way for more private sector hospitals. New Century has a relatively small portfolio of three hospitals, but a leading 30.4% market share of pediatric care revenues in Beijing in 2015.

Investors are also likely to be heartened by the fact that the group’s pre-IPO investors did not cash out. This suggests they believe there is further upside, although it does create an overhang. 

Two CDH funds will have a combined 12.4% stake of the enlarged pre-greenshoe, while China Development Bank will hold 4.1% and Boyu Capital 6.6%. All three will be subject to a six-month lock up.

Pre shoe, New Century will have a 25% freefloat and shares will begin trading on January 18. Its cornerstone investors are China Life Reinsurance, China Citic Bank and Janchor Partners.

Joint sponsors were Bank of America Merrill Lynch and CICC with BOC International and China Merchants Securities as joint bookrunners. 

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