Xiwang Special Steel may have put its mark in the books for being the first Hong Kong initial public offering of size in 2012, but its trading debut will be best forgotten. The company, which raised $171 million from the IPO, fell 19.6% when it hit the market yesterday, setting a poor trend for the listing hopefuls waiting in the wings. The Hang Seng Index dropped 0.8%.
With the IPO market already off to a slow start this year as bankers have found the valuation gap between what investors want to pay and what issuers are prepared to offer tough to bridge, the last thing needed was a deal that adds further to the cautious attitude among investors. But perhaps one shouldn’t deduct too much from this one deal. Indeed, one observer shook it off by arguing that “thankfully it is a small deal, so not that relevant”.
However, it is by far the largest among the 10 IPOs on the Hong Kong main board so far this year. The second largest company raised only $55 million and the combined fundraising size for the other nine companies is only about $255 million. Xiwang looks set to be surpassed this morning, though, when Canadian oil producer Sunshine Oilsands is due to price a Hong Kong IPO of between $580 million and $606 million. That deal, which is supported by $350 million of cornerstone demand, is reportedly doing quite well.
The writing appeared to be on the wall for Xiwang even before the opening bell yesterday. In a statement published on the stock exchange website on Wednesday the company revealed that the demand for the IPO had been weaker than earlier indicated by banking sources. In fact, the institutional tranche, which was meant to account for 90% of the offering was not fully covered and the bookrunners had made up for the shortfall by reallocating the unsubscribed shares to retail investors, who had subscribed to 1.6 times the shares originally set aside for them. This meant that retail investors bought 16.3% of the deal, while institutional investors took only 83.6% -- which is significant because in Hong Kong retail investors tend to sell a lot quicker than institutional investors, often on the first day.
It also meant that the bookrunners weren’t able to allocate the 15% overallotment option since there was no excess institutional demand to absorb these shares. This option, which is also referred to as a greenshoe, is used by the bookrunners to help stabilise the share price when the stock starts trading. If the share price falls a lot, they can support the market by buying back the greenshoe shares and once the price stabilises they can re-sell these same shares to investors. If the greenshoe shares are still in the market at the end of the 30-day stabilisation period, the bookrunners can exercise the greenshoe (partially or in full) and permanently add these shares to the size of the deal. If the shares have been bought back then the shoe won’t be exercised and the shares will be returned to the company or the shareholder who lent it to them.
When the bookrunners have no greenshoe to work, as was the case with Xiwang, they are unable to support the price if it falls.
And while sources initially said that the institutional tranche was mainly bought by a few hedge funds and global funds that had a specific view on steel and who thought the valuation was cheap, it now appears that a lot of the shares went to friends and family and that the institutional interest was in fact quite thin. As a result, there were few “natural” buyers when the stock opened below the IPO price yesterday.
It seems most retail investors also chose to sell when this happened. A total of 113.3 million shares (23% of the IPO) changed hands during yesterday’s trading session, which is more than the 81.8 million shares that were sold to retail investors. After an initial dip to as low as HK$1.98 – 25% below the IPO price – the share price did recover some ground however and finished the day at HK$2.13.
Xiwang sold a total of 500 million shares, or 25% of its share capital. The demand was price sensitive and the price was fixed at the bottom of the offering range at HK$2.65, which translated into a 2012 price-to-earnings multiple of 3.8 times based on the bookrunner consensus. The valuation was viewed as cheap in relation to China Oriental Group, which is viewed as the closest comparable and at the time traded at about five times this year’s earnings. However, some investors and analysts who are not that optimistic about the near-term outlook for the Chinese economy argued that cyclical stocks like steel makers are cheap for a good reason and could remain at these levels for a while.
After yesterday’s drop, Xiwang is now valued at 3.1 times this year’s earnings.
The company is an electric arc furnace steel manufacturer, which means it makes steel and steel products from metal scraps rather than from iron ore. It is the largest company of its kind in the Shandong province where steel scraps are particularly prevalent. Among its special steel products are seamless steel pipes, bearings, gearings and steel welding wires.
J.P. Morgan was the sole global coordinator and also acted as joint bookrunner together with ABC International, CCB International, Citi and Kim Eng Securities.
But Xiwang wasn’t the only company to start trading yesterday. It was accompanied by Christine International Holdings, which operates a retail chain of bakeries in China. It too had a fairly lacklustre debut and fell at opening. However, by mid-morning it had returned above the IPO price and it finished the day one Hong Kong cent higher (+0.6%) at HK$1.61.
The company, which was brought to market by BNP Paribas, saw relatively greater demand for its IPO, although admittedly the deal was a lot smaller at just $52 million. The deal was about two times covered overall, according to a source, and the 10% retail offering was 3.5 times subscribed. More importantly, though, the institutional tranche was primarily bought by long-only funds, including a lot of Hong Kong-based accounts. Some hedge funds also participated. Asia accounted for the majority of the demand, complemented by a few orders from Europe and the US.
Christine sold 250 million shares at a price of HK$1.60, which was at the bottom of the price range and valued the company at 9.7 times this year’s earnings.