New Century Healthcare IPO kicks off 2017

Chinese private hospital operator launches Asia’s first IPO in the new calendar year.
New Century Women's and Children's Hospital in Chaoyang district, Beijing
New Century Women's and Children's Hospital in Chaoyang district, Beijing

New Century Healthcare, a Beijing-headquartered pediatric hospital operator, launched the management roadshow for a HK$1 billion ($129 million) initial public offering on Wednesday in what could be the first major deal in 2017.

The initial terms of the deal are 120 million new shares pitched at HK$6.36 to HK$8.36 each and a 15% greenshoe option to sell an additional 18 million new shares. This means the company’s high profile pre-IPO investors including China Development Bank, CDH Investments and Boyu Capital will not be selling shares in the IPO.

The hospital operator has picked a traditionally quiet period in January to launch its share sale, but the relatively small size of the deal means it is unlikely to feel the impact. For the same reason, however, the deal is unlikely to be a good gauge of investor sentiment entering into the new year.

This is compounded by the fact that the deal is heavily allocated to cornerstone investors, with three of them taking approximately 59% of the entire deal assuming maximum pricing, leaving only around $53 million for public subscription.

China Life Reinsurance is the biggest cornerstone investor with a commitment of $30 million, while China Citic Bank is subscribing to 23.9 million shares — worth between $20 million and $26 million — and Janchor Partners is buying $20 million.

Rarity value

New Century Healthcare will hope to replicate the success of Virscend Education, the first fully-marketed IPO in the 2016 calendar year. Virscend ended up as Hong Kong’s third best-performing deal last year, offering a 130% return in less than 12 months.

For healthcare specialists, New Century Healthcare should enjoy some rarity value since it will be only the fourth hospital operator listed in Hong Kong after China Resources Phoenix Healthcare, Harmonicare Medical and Wenzhou Kangning Hospital.

Harmonicare Medical is widely seen as New Century Healthcare’s closest comparable stock since both specialise in providing pediatric, obstetrics and gynaecology services. But Harmonicare is much larger,  with 11 hospitals compared to the three Beijing hospitals that New Century Healthcare manages.

Harmonicare's shares have lost about a third of their value since listing in July 2015. The stock now trades at 30.7 times earnings on a rolling twelve-month basis.

One source familiar with the situation said the IPO of New Century Healthcare is being pitched at between 23.7 and 31.1 times forward price-to-earnings on a post-greenshoe basis, suggesting the company could command a similar valuation to Harmonicare at the top end of the range — or a discount of around 23% if the shares are priced at the bottom.

In any case, New Century Healthcare needs to reverse its declining profitability. Its net earnings have dropped for three straight years to Rmb67 million in 2015 from Rmb83 million ($12 million) in 2013. In the first nine months of last year, net profit dropped 16% after including listing fees and a one-off loss on convertible preferred shares.

The company hopes to restore growth by adding new hospitals. About 60% of the IPO proceeds will be used to develop two new hospitals and seven new clinics, and another 10% will be spent on the construction of a new medical diagnostic centre and for upgrading a surgery centre.

The company made the rare move of kicking off the retail offering on December 30, ahead of the institutional offering that started on Wednesday. Both tranches will close on 11 January and the shares are set to begin trading on 18 January.

Bank of America Merrill Lynch and CICC are the sponsors of the IPO. BOC International and China Merchants Securities join them as bookrunners.

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