Pre-marketing activities go ahead despite weak start to September

Philippine supermarket chain Puregold steals a pre-marketing lead on Hong Kong IPO rivals Sany Heavy Industry, XCMG Construction Machinery and Citic Securities, while the Indian government gets ready to sell down its stake in ONGC.
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Shoppers enter a Puregold store in the Philippines</div>
<div style="text-align:left;"> Shoppers enter a Puregold store in the Philippines</div>

Asian equity markets suffered another day of losses yesterday on the back of a dismal non-farm payrolls report that showed the US economy failed to add any new jobs last month.

The report reignited concerns about a recession and sent the Dow Jones index 2.2% lower on Friday. And here in Asia, most markets lost between 1.5% and 3% yesterday — Korea led the decliners with a 4.4% drop, while Indonesia was the only market in the black with a 0.6% gain.

But September traditionally means a pickup in primary market activity in the region and this year is no different, even if the backdrop does look shaky at best. For now, bankers are going ahead with pre-marketing activities as planned in the hope that things will turn around before they have to commit by setting a price range and opening the order books. Pipelines at most banks are bulging — especially after a number of deals were postponed or pulled in May and June — and nobody wants to miss an opportunity to get their deals done if a window does open up and risk getting stuck among a crowd of deals later this year.

Yesterday, bankers started investor education for the Hong Kong IPOs of Chinese machinery makers Sany Heavy Industry and XCMG Construction Machinery, which are aiming to raise up to $3 billion and $2 billion respectively. And today, the banks involved with Citic Securities’ pending H-share IPO, will follow suit. The latter is expected to raise about $3 billion and is the first of a long row of financial sector companies that are hoping to tap the Hong Kong market for funds in the next few months.

Sany and XCMG are viewed to be in a slightly better position as the construction sector is still seeing investments and the growth outlook appears to be somewhat clearer than in the financial sector. However, all three companies face the challenge of already being listed in China’s domestic A-share market, which means that they will to some extent be marketed against a live share price. As long as the A-share price remains relatively stable, that shouldn’t matter too much since foreign investors still have limited access to the A-share market and the valuation versus other Hong Kong-listed comps is therefore more important. But, if the A-share price should fall sharply after the IPO price range has been set, it could make it difficult to price the deal.

And while bankers involved in the two issues are playing down this fact, there is no getting around that Sany and XCMG, which operate in largely the same industry, will also be competing head to head with each other. In an already challenging market, that could reduce the amount of funds available to either of them.

Sany and XCMG are both planning a full two weeks of investor education, with their respective roadshows kicking off on September 19. Citic Securities is aiming for a slightly shorter pre-marketing period with the roadshow start set for September 16.

The large size of these three IPOs will be a real test of the investor appetite for market newcomers and the outcome of these deals is likely to set the tone for the Hong Kong IPO market for the next five to six weeks at least.

But they are by no means alone. As reported earlier, Hongguo International, which makes and sells women’s footwear for international brands such as Nine West and Guess, started pre-marketing for a Hong Kong IPO of around $250 million last week. The company, which has previously been listed in Singapore, has hired Citi and DBS to handle the deal.

Also stealing a slight lead on the bigger deals in Hong Kong is Puregold Price Club — a private sector operator of supermarkets and hypermarkets in the Philippines, which started pre-marketing last Wednesday and is planning to kick off a formal roadshow on Friday this week. The company is aiming to raise between $200 million and $250 million to fund its aggressive growth targets and is taking advantage of the prevailing positive sentiment towards domestic consumption stories.

Two clear signs of this were the IPOs of Sun Art Retail in Hong Kong in July and Sheng Siong Group in Singapore in August. Both deals attracted strong demand from investors in the primary market and both stocks have performed well since listing, despite the turbulence in global markets in the past month.

Sun Art, which operates hypermarkets in China under the dual brands of RT-Mart and Auchan, has gained 35% since its July 27 debut. The $1.2 billion IPO attracted more than 500 institutional investors and nine top-quality cornerstones, which included the Government of Singapore Investment Corp (GIC), Khazanah, Tiger Global Management and a unit of Bain Capital.

Singapore-based supermarket chain Sheng Siong surprised the market by going ahead with its IPO during the height of the market turbulence in early August, but succeeded in raising S$116 million ($95 million) and attracted key anchor investors such as JF Asset Management and Prudential Asset Management. The stock is up 44% since the August 17 debut, despite a decline in the past three sessions.

Puregold will be hoping that this enthusiasm for consumer plays will extend to the Philippines as well and given that the Philippine stock market is currently the second best performer in Asia with a 4.3% gain year-to-date, there is a strong likelihood it will. Sources close to the deal said last week that the initial response among investors was good and that many view the stock as a good opportunity to increase their exposure to the Philippines. The deal was also getting quite a lot of attention simply because there wasn’t much else to focus on.

Adding to Puregold’s attraction is the fact that it is focused purely on retailing, while most of its competitors are part of larger conglomerates that give investors exposure to a lot of other sectors as well. The listing candidate ranks as the second largest supermarket operator after SM Prime. Analysts also point to the fact that 80% of the grocery shopping in the Philippines is still done in markets or in small mom and pop shops, which suggests significant growth opportunities ahead.

Puregold is selling 30% of its share capital in the form of 600 million shares, of which 500 million are new. There will also be a greenshoe of an additional 90 million shares. Of the total, 70% will be targeted to international investors, while the remaining 30% will be split between domestic institutions and retail investors.

A price range won’t be set until the start of the roadshow, but in an earlier filing the company said that the final price will be no more than Ps18 per share. This implies a maximum deal size of Ps10.8 billion ($255 million) pre-shoe and a maximum market capitalisation of Ps36 billion.

The IPO is currently set to price after the US market closes on September 20 and the trading debut is scheduled for October 5. HSBC and UBS are joint bookrunners for the IPO, while BDO Capital & Investment Corp and First Metro Investment Corp are acting as domestic lead underwriters.

Elsewhere, India’s Oil and Gas Corp (ONGC) is set to kick off the roadshow for a long-awaited government sell-down today. The government is selling a 5% stake, which will reduce its holdings in the country’s largest oil and gas producer to about 69.1%. Based on ONGC’s closing price of Rs256.85 in Mumbai yesterday and a plan to sell approximately 427.77 million shares, the deal could raise up to Rs109.87 billion ($2.4 billion). Retail investors and company employees will be able to buy the shares at a 5% discount.

According to the current timetable, the price range will be announced by September 19 and the bookbuilding will open the following day. Bank of America Merrill Lynch, Citi, HSBC, JM Financial, Morgan Stanley and Nomura are bookrunning lead managers for the deal.

Sany Heavy Industry’s IPO is being arranged by Bank of America Merrill Lynch, Citi and Citic Securities, while XCMG is being brought to market by BNP Paribas, China International Capital Corp, Credit Suisse, HSBC, Macquarie and Morgan Stanley.

Citic Securities has mandated ABC International, BOC International, Bocom International, CCB International, Citic Securities and ICBC International as joint bookrunners. Bank of America Merrill Lynch, CLSA, HSBC and Morgan Stanley have been given the title of international co-ordinators. The expectation is that their role will be similar to that of the bookrunners.

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