Puregold and Tenfu price, but Xiao Nan Guo cancels its IPO

Philippine supermarket chain Puregold raises $172 million after fixing the price at the bottom of the range, while Chinese tea retailer Tenfu prices above the mid-point to raise $161 million.
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Photo: AFP</div>
<div style="text-align:right; font-size:7pt; color:rgb(119, 119, 119);"> Photo: AFP</div>

Investors have shown that they are still happy to invest in consumer retail stocks in Asia, with Puregold Price Club in the Philippines and Tenfu (Cayman) Holdings in Hong Kong both managing to price their initial public offerings yesterday. Chinese tea retailer Tenfu was even able to fix the price above the mid-point of the range, sending a positive signal to other listing hopefuls in the queue.

The two companies raised a combined $333 million towards their future expansion.

However, investors were less keen on Xiao Nan Guo Restaurants Holdings, a small-cap Chinese restaurant chain, which surprised the market by cancelling its Hong Kong IPO yesterday morning. Xiao Nan Guo was scheduled to price the deal following the close of trading in New York Tuesday, but instead bankers told investors that the company had decided not to proceed with the offering at this stage due to the current market conditions. The IPO was arranged by Bank of America Merrill Lynch and Standard Chartered.

According to sources, the $71 million to $95 million IPO was fully covered, but supposedly the order book lacked the desired depth. The company is also very protective of its brand and may have been worried about the potential negative effect if the stock was to trade down after the debut. However, withdrawing an IPO could have a similar impact.

The small deal size may partially explain investors’ reluctance to dive in, as it suggests that the liquidity in the stock may not be that great. This could make it more difficult to get out of a position quickly.

And Xiao Nan Guo may have been right to worry about the after-market as the global trading pattern in the past 24 hours indicates that the concerns about the European debt crisis and slowing growth in the US are still very much alive. The Hang Seng Index fluctuated widely yesterday, hitting a low below 18,700 points shortly after opening, then moving briefly into positive territory above 19,000 points in the early afternoon, before falling another 300 points. It closed down 1% at 18,842 points.

European markets were also down sharply and in the US the key indices tumbled into the close after the Federal Reserve updated its assessment on the US economy to say that it sees “significant downside risks to the economic outlook, including strains in global financial markets”. Previous statements have referred only to “downside risks”. US markets were also under pressure after Moody’s downgraded the long-term credit ratings of Bank of America (two notches) and Wells Fargo (one notch), as well as Citi’s short-term debt rating (one notch). The Dow Jones index lost 2.5%, the S&P500 dropped 2.9% and the Nasdaq Composite finished down 2%.

Details of the Fed’s “operation twist”, aimed at bringing down long-term interest rates, were largely in line with expectations and had no noticeable impact on the equity markets overnight, although treasury yields fell both at the short and long end of the curve.

With the long gap between the IPO pricing and the actual trading debut in Asian markets, companies face the possibility that valuations of other companies in the same sector will have fallen before they hit the market. Hence, most companies tend to price at the bottom of the indicated range at times of high volatility and uncertainty.

Tenfu (Cayman) Holdings
However, the demand for Tenfu was strong enough to warrant a higher price, sources say. In fact, the deal was multiple times covered across the price range and attracted about 90 institutional investors. Contrary to shoe manufacturer and retailer Hongguo International, Tenfu also attracted enough demand from the Hong Kong public to cover its 10% retail tranche — although the interest was by no means overwhelming. One source said the final subscription ratio was less than two times.

The company, which is being brought to market by China International Capital Corp, Credit Suisse and Polaris Securities, fixed the price at HK$6 per share for a total deal size of HK$1.25 billion ($161 million). The shares were offered in a range between HK$4.80 and HK$6.80. The intention with the pricing was said to be to send a strong message, but not to price too high and perhaps spook investors.

The final price translates into a 2011 price-to-earnings multiple of 20.8 times, which pitches Tenfu at a significant discount to noodle maker Tingyi and snack food manufacturer Want Want, which are currently trading at 32.4 times and 31 times this year’s earnings respectively. The pricing is on par with that of shoe manufacturer and retailer Belle, which is quoted at 20.8 times. While in a different sector, Belle was viewed as a secondary comp because of its similarly strong brand name.

The IPO was supported by General Atlantic, which bought about 35% of the offering as a cornerstone investor. And, according to sources, the rest of the deal was basically covered by anchor investors before launch. The final order book included good quality long-only investors as well as fundamentally-focused hedge funds. Momentum funds and high-net worth accounts were less interested.

Tenfu sold 208.62 million new shares, or 17% of its share capital. The deal comes with a 15% greenshoe that could boost the total deal size to $185 million, if fully exercised. The shares are due to start trading on Monday.

Puregold Price Club
Puregold Price Club, a private sector operator of supermarkets and hypermarkets in the Philippines, saw more price sensitivity, although sources said that this deal too was multiple times covered with about three-quarters for the offering allocated to long-only accounts.

However, the price was fixed at the bottom of the Ps12.50 to Ps16.50 price range for a total deal size of Ps7.5 billion ($172 million).

The final price translates into a 2012 P/E ratio of 11.8, according to the joint bookrunner consensus, and a discount to SM Prime. The latter is the country’s largest operator of supermarkets and malls, but as a conglomerate it also has other businesses such as hotels, property and banking. SM Prime is currently trading at 16.7 times next year’s earnings.

One observer said investors liked the deal because Puregold is the only pure play quality retailer with critical mass and market share in the Philippines.

The final order book is said to have comprised more than 50 international investors, including quite a few global long-only funds, Asian regional funds and global hedge funds. Again, there wasn’t much demand from high-net worth individuals, suggesting they are not particularly keen to increase their exposure at the moment.

Puregold sold 600 million shares, or 30% of its enlarged share capital, including 500 million new shares. The deal comes with a 15% greenshoe that could boost the deal size to as much as $198 million.

As indicated earlier, the intention is to allocate 70% of the deal to international investors while the rest will be sold to domestic institutions and retail investors through a separate offering that will open on Friday and run until September 29. The trading debut is scheduled for October 5.

HSBC and UBS were joint bookrunners, while BDO Capital and First Metro Corp are lead underwriters for the domestic portion. Evercore Partners acted as a financial adviser to Puregold.

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