Minor dry bulk shipper Pacific Basin raised HK$1.09 billion ($140 million) from a Hong Kong IPO yesterday (Thursday) after securing a much stronger order book than initially anticipated. The institutional order book closed 10.5 times covered and the retail order book 3.6 times covered, leading to pricing at HK$2.50 per share, the mid-point of the deal's indicative price range.
It is very unusual to have such a large oversubscription differential in favour of institutional investors. Normally it is the other way round, with retail investors dominant.
No other Hong Kong IPO this year has built an order book where the institutional oversubscription multiple is higher than retail. Two IPO's - Nam Tai and Solomon Systech - have had books close the same level oversubscribed.
For retail investors, the key swing factor appears to have been the difficult IPO of China Shipping, which was priced at the bottom of a revised indicative range in mid-June and has traded down about 15% since then.
Institutional investors, on the other hand, were able to distinguish between the container sector (China Shipping) and dry bulk sector (Pacific Basin). Demand was buoyed by a reasonable valuation, high dividend yield and perhaps most importantly of all, sudden upside momentum in global comparables.
What ultimately saved the deal and drew institutional investors back to the IPO market was a turnaround in the Baltic Dry Index (BDI) and the stocks which track it. At the beginning of roadshows, the BDI had slid from a high of 5,684 in early February to 2,622 at the end of June. Since then, it has jumped 35%, closing Wednesday at 3,545.
Global dry bulk carriers such as Thailand's Thoreson Thai and Precious Shipping have also risen about 15% to 20% and seen their P/E ratios expand to about 5.5 times 2004 earnings.
Bankers attribute the turnaround to a, "correction of an overcorrection," initially prompted by China's efforts to cool its economy.
"Investors ultimately realised that the supply/demand dynamics in the dry bulk market are very different to the container market," says one specialist. "Although global demand continues to rise, the global fleet of handysize vessels is declining, because there are big backlogs at shipyards, which always prioritize container ships as margins are higher."
Management is said to have achieved a hit rate of more than 70% from one-on-one meetings organised by lead manager Goldman Sachs. Just over 100 accounts participated in total, with about 15 accounts placing orders for more than 10% of the deal. Geographically, the order book had an equal split between the three regions.
The deal was marketed between HK$2.20 and HK$2.90 per share, which represented a PE range of 4.7 to 6.2 times 2004 earnings. It was priced at 5.5 times, flat to the Thai comps.
However, for investors interested in the sector, Pacific Basin offers a far more defensive dividend yield of 9% based on a 50% pay-out ratio. By contrast the Thai's are yielding less than 4%.
The offering had a split of 57% primary shares and 43% secondary shares and may net proceeds of up to $160 million if the greenshoe is exercised. Alongside bookrunner Goldman Sachs, JPMorgan was joint lead manager, with Cazenove and HSBC as co-leads. Retail was allocated 10%.
Pacific Basin is a minor dry bulk carrier, which specializes in forestry products, fertilizer, grain and cement. Its top management are western and while the company is based in Hong Kong, it has a pan-Asian footprint. Proceeds are being used to purchase new ships. Since net gearing is relatively low for a shipper (60% in 2003), the company is able to sustain a concurrently higher dividend policy.