Paradise found for China Yongle

Investors love of Chinese consumer plays powers Hong Kong IPO for electronics distributor China Paradise.

China Paradise, also known as China Yongle, priced its 455.8 million share IPO just off the top its indicative range on Saturday (October 8) after witnessing strong demand. The institutional order book for the $132 million deal closed 19 times oversubscribed and the retail order book 135 times oversubscribed.

This means the full retail clawback was triggered, taking allocations up from 10% to 50%. Institutions were allocated a further 35% and private banking clients 15%, after submitting orders for roughly $500 million.

Specialists say that almost half the institutional allocation went to the top six accounts in the book, which had an overall geographical split of 40% Asia, 40% US and 20% Europe.

The Morgan Stanley and Cazenove-led deal was initially marketed at HK$1.80 to HK$2.30 per share, but the bottom end was revised up during the marketing process to between HK$1.90 and HK$2.30. In the end, the leads and the company decided to leave five cents on the table to better ensure a strong secondary market debut in vascilating secondary markets. Last week, for example, pork processor China Yurun climbed just 2.7% on its first day's trading, despite the fact that the retail portion of its $198 million IPO had closed 156 times covered and the institutional portion 21 times.

At HK$2.25 per share, China Paradise has been valued at about 16 times 2005 forecast earnings. At this level it has come at a slight premium to its main comparable GOME Electronic Appliances, which was trading around 15.8 times on Friday.

At first glance, the fact this premium is quite surprising. Most new listings factor in an IPO discount and GOME is a much bigger company than China Paradise.

However, the former has performed very badly this year and there was initially some concern this might impact the kind of valuation China Paradise could achieve. It was also the main reason why China Paradise's private equity investors - Morgan Stanley and CDH - decided not to sell any shares in the IPO, which ended up constituting all new shares.

At issue was whether investors believed GOME's poor trading record was company or sector related. Some analysts believe all the electronic retailers are coming under severe margin pressure and that this will impact future earnings.

GOME's first half figures were a severe disappointment to the market, with net income rising just 4% over the first six half of the year. Since then the stock has cratered and is now down 31.21% year-to-date.

But the leads successfully countered that this performance was company specific and were able to back their arguments up by highlighting the trading performance of a second comparable, Shanghai-listed Suning Appliances. The company, China's second largest electronics retailer, is up 43.2% year-to-date in a falling market.

In particular, they argued that investors are wary of GOME because a lot of the company's assets are still with the parent and there is not enough transparency between the list co and parent.

"China Paradise has a much cleaner corporate structure," says one. "All the assets are in the list co."

Company supporters now believe the stock could trade up to 20 to 21 times earnings in the secondary market, putting it in line with food retailers such as Lianhua and Wumart.

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