Pacific Online raises $121 million from IPO

The Chinese internet content provider prices its Hong Kong offering above the mid-range, while Bio Beauty decides to call it a day.
China-based internet content provider Pacific Online has raised HK$940.5 million ($121 million) from its Hong Kong initial public offering after fixing the price above the mid-point of the range, sources say.

This comes at a time when other Hong Kong IPOs in the $100 million to $300 million range have been struggling, with two deals being pulled in the past week and others facing selling pressure immediately after they hit the market. Skincare and cosmetics manufacturer Bio Beauty Group called off its offering on Monday after completing the entire roadshow.

Being an internet content provider it is possible that Pacific Online has benefited from the overwhelming demand for Alibaba.comÆs IPO in October and the strong trading performance of this stock since the debut. However, while it is by no means as big as Alibaba, observers note that Pacific Online has made a name for itself in its own right by running five vertically integrated internet portals. These include: PConline, which is the largest portal (measured in terms of advertising revenue) in China specialising in IT product-related content; and PCauto, the countryÆs second largest portal by ad revenue specialising in automobile-related content.

ôPConline is well-known in China. It brings in a lot of advertising revenue and its main business is simple. It is just an attractive internet play,ö says the source.

In any case, the company decided to go ahead with its listing plan and was able to drum up enough investor support to meet its fund-raising target.

According to one source, the 90% institutional tranche was six times covered, while retail investors subscribed to 11 times the shares earmarked for them. Notably, there was also said to have been little price sensitivity in the book. Even so, the company didnÆt price the deal too aggressively, as the market sentiment remains fickle, the source says.

Others note that the week-long lag between pricing and the first day of trading for Hong Kong IPOs makes it a challenge to set the price at times of high market volatility. This is exacerbated by the fact that the year is drawing to a close, and more and more investors are shutting down their portfolios each day. On top of that, Pacific Online also had to take into account a potentially negative market response to this yearÆs final interest rate announcement from the US Federal Reserve, which was due in the early hours of this morning Hong Kong time.

The price was set at HK$3.30, versus a range of HK$2.98 to HK$3.58. The final price values the company at a multiple of 17 times its 2008 projected earnings.

Another listing candidate that has decided to press on with its IPO is Vietnam Manufacturing and Export Processing, a Vietnamese manufacturer of scooter and cub motorbikes, which aims to raise up to HK$1.05 billion ($135 million). BNP Paribas is acting as the sole bookrunner for both Vietnam Manufacturing and Pacific Online.

Investor sentiment for new listings has soured in recent weeks after Sinotrans Shipping and Sinotruk both failed to stay above their issue prices when they started trading, marking a distinct break from the enthusiastic response received by most other Hong Kong newcomers since the August correction.

This scared off Chinese light-gauge aluminium foil producer Xiashun Holdings and Bio Beauty, which likely feared that they too would struggle to stay upright in the current headwind.

Xiashun became the first Hong Kong listing candidate in 12 months to call off an IPO during the roadshow when it postponed its $273 million deal last Monday citing the difficult market conditions. According to a source, the company elected to withdraw the offering because it felt it would not be able to achieve the price it wanted. JPMorgan and UBS were the joint bookrunners for that deal.

Meanwhile, Bio Beauty said in a statement issued late on Monday this week that it had agreed with the global coordinator (Macquarie Securities) that in light of the market conditions and the adverse trading performance of some of the recent IPOs, it would be in the best interest of the company not to complete the offering as planned. The aim is to re-launch the deal early next year or ôas soon as the markets are looking betterö, according to a source.

Bio BeautyÆs up to $309 million offering, which was due to price on Monday, was fully covered on the second day of the roadshow although the retail participation was said to have been disappointing - especially considering that the company is a play on Chinese consumption.

One reason for Bio BeautyÆs decision was believed to have been indications in the grey market late last week that Dongyue Group would be trading down on its debut this Monday and indeed this turned out to be the case. Having priced its IPO towards the low end of the range, ChinaÆs leading refrigerant and polymer producer fell 12% on its first day. It recovered part of those losses yesterday, leaving the stock 5.6% below the issue price after the first two days. Citi was the sole bookrunner for DongyueÆs IPO.

Pacific Online offered 285 million shares, or 30% of the company, of which approximately 67% were new shares. A greenshoe could increase the deal size by a further 15% to $139 million.

Investors compared the company to various Hong Kong-listed internet content providers such as Tencent Holdings, Alibaba and TOM Group, although it is significantly smaller in size than the first two operators. Tencent and Alibaba currently trade at 2008 price-to-earnings multiples of 47.7 and 127.7, while TOM trades at 35.5 times next yearÆs earnings.

Alibaba received tremendous demand for its IPO, drawing more than 1,200 institutional investors and HK$446.7 billion worth of retail dollars. Its price nearly tripled on the trading debut, and has been trading in a range between HK$27 and HK$40 since then. It closed at HK$33.75 yesterday, which represents a 150% gain above the IPO price of $13.50.

Nonetheless, Tencent has been somewhat affected by the recent market fluctuations, falling 40% in November from a high of HK$70.10 on October 30. It closed at HK$56.95 yesterday. TOM was down more than 70% on the year at one point, but has recovered more than 20% this month to yesterdayÆs close of HK$0.71 yesterday.

According to the prospectus, PConline projects its net profit will grow 34% to at least Rmb90 million ($12 million) in 2007 after expanding at 46% in 2006 and 43% in 2005. It enjoys lucrative profit margins as well and recorded a net margin of 73% last year.

About 39% of the IPO proceeds will be reserved for strategic acquisitions, investments and joint ventures. The company will spend another 23% to expand and upgrade its internet portal operations, including the launch of new portal initiatives. Approximately 28% of the funds will be used to expand its sales and marketing teams, enhance its research and development, develop an e-commerce platform and to acquire new facilities.

Pacific Online is due to start trading on December 18.
¬ Haymarket Media Limited. All rights reserved.
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