Renhe IPO reaches the finish line û but only just

The Chinese underground mall operator raises $435 million from a reduced offering, but fails to attract international investors.
Renhe Commercial Holdings has managed to complete its initial public offering and will become the first company to list in Hong Kong since mid-August. It is also the only company of size to have been in the market with an IPO globally this month, although the hoops it had to jump through to pull it off doesnÆt exactly instill confidence that the market is about to recover.

According to sources, the deal attracted minimal interest from international investors even after the company and its four bookrunners re-launched the offer at a fixed price 19.3% below the bottom of the original range and kept the books open for an extra week. Some say that including Warburg Pincus, which came in as a cornerstone investor taking $50 million worth of shares, there were not even a handful of non-Chinese institutions left in the book when the extended offering period ended last week, and the greenshoe had to be scrapped since there wasnÆt enough demand to allocate the extra 15%. A number of Hong Kong retail investors also opted to walk away when given the opportunity to do so.

However, in the end, there were enough orders from within China to carry the deal at the reduced size of HK$3.39 billion ($435 million) and Renhe will get its desired listing in Hong Kong on Wednesday. BOC International, HSBC, Morgan Stanley and UBS were joint bookrunners.

The offer was re-launched after the company failed to attract enough investors to price the deal as scheduled on October 10. This wasnÆt too surprising given the challenging market environment û the Hang Seng Index fell 20% between the start of the roadshow of September 29 and the intended pricing date û which not only kept most international investors away, but also made it difficult for some of the Chinese investors to come up with cash. Because of the global liquidity shortage, the bookrunners were said to have been less willing to provide credit lines to investors û especially to names that were new to them, as would have been the case with many of the Chinese investors.

Even with the support from institutions, corporates and individuals in China though, there was a question-mark over whether the operator of underground shopping centres would be able to meet a requirement that says the placement tranche must be distributed to at least 100 accounts. The sources say it did manage this, but only just. A second listing criterion, stipulating that a Hong Kong IPO has to be bought by at least 300 shareholders, was met with greater ease, even though the number of valid retail applications dropped from 815 after the initial offering period to just over 600 at the end of last week. There was no information on how much of the 10% retail tranche had been taken up in the end, but when the initial deal closed it was only about 7% subscribed and the loss of about 200 investors suggests it will be even less now.

As always when new information is presented to investors after retail offering is completed û in this case the re-offering of the deal at a lower price û retail investors must be given the chance to reassess their orders. The most common way to do this is to allow investors to cancel their orders if they no longer want to be part of the deal (as was done on casino operator SJM HoldingsÆ IPO in July). However, Renhe chose the opposite route, meaning retail investors who wanted to stay in the book had to confirm their earlier orders with their broker during a three-day window from Tuesday to Thursday last week. This may have cost the company a few retail investors who simply werenÆt aware that they had to re-confirm, or who for one reason or another werenÆt able to do so within the required timeframe.

Still, the deal did get done in an environment where new issuance has completely stalled in most markets. The US, for instance, hasn't seen a single IPO in the past 10 weeks. Being a listed company, Renhe will now have the opportunity to raise additional funds through a follow-on offering. That ought to be slightly easier to execute than an IPO since follow-ons are typically not sold at a fixed price and valuation, but are priced off a moving market price. They also donÆt require a roadshow, meaning the company can make use of brief periods of secondary market stability and positive sentiment to sell shares.

Whether that was the intention for pushing ahead with the listing despite the deteriorating market conditions isnÆt clear (perhaps it was just desperate for money to pursue its aggressive expansion plans), but there is no question that the company had its sights set on pulling this off no matter what. Indeed, given the lack of international interest, the Renhe management itself appears to have been very active in pulling together the necessary number of investors û to the extent that it almost took over the role as distributor from the bookrunners.

The result is a shareholding structure that looks more like a domestic Chinese offering than a Hong Kong IPO and while that approach managed to save Renhe, one can only hope that this is a one-off and doesnÆt set a precedent for other Chinese listing candidates. For one, the fact that many of the investors are close to the company suggests that the stock will see little trading in the secondary market as few are expected to sell. Indeed, some of these investors may even do some follow-on buying after the debut, which means the lack of a greenshoe may not be that crucial. The shares overallotted through the greenshoe are otherwise used to stabilise the share price in the first month and prevent rapid declines.

The company does have a few international investors among its shareholders, however, as a group of external investors were invited to take a stake in December 2007 and January 2008 through the purchase of class-A preference shares. Largest among them is New World Investors, which will own 7.2% after the IPO, while Capital Funds, Global Giant Enterprises and venture capital firm Sequoia Capital will each own less than 5%. Renhe is controlled by a Mrs Hawken, who owns 69%.

Under the revised offering, Renhe sold 3 billion new shares, or 15% of the company, at a fixed price of HK$1.13. This values the company at 4.2 times the consensus syndicate earnings forecast for 2009 and at 10.5 times the companyÆs own earnings forecast for this year of Rmb1.9 billion (HK$2.2 billion), which hasnÆt changed despite the lower IPO proceeds and the latest market turmoil. The Hang Seng Index was largely flat last week with a fall of only 1.6% over all. However, after gaining sharply on Monday and Tuesday, it then fell 13.5% in the final three days, once again ending the week on a negative note.

When it launched the IPO in September, Renhe offered the shares in a range between HK$1.10 and HK$1.20, which would have allowed it to raise at least $540 million. Initially, however, it had hoped to raise a lot more than that. When it kicked off pre-marketing in early September the talk was of a $600 million to $800 million deal and earlier in the year, it was said to have been hoping to raise as much as $1.5 billion to $2 billion, although that was before the markets started to trend lower in earnest and before it obtained a waiver to sell only 15% of its enlarged share capital (versus 25% originally).

According to Euromonitor, Renhe is the largest privately owned operator and developer of underground shopping centres for clothing and accessories in China in terms of gross floor area. The company falls somewhere in between the commercial real estate and retail sectors. It operates shopping malls but doesnÆt get a percentage of the sales generated by its tenants and at the same time it isnÆt legally classified as a developer since all its malls are built as civil air defence shelters and as a result is exempted from land use right premiums, land appreciation tax and property tax û giving it a distinct advantage over the traditional developers of commercial properties. In doesnÆt own any land bank, but rather has operational rights for the facilities it builds for 40 years.

Among the key investment arguments were high earnings growth and impressive margins. By placing its malls underground, Renhe is also able to gain access to prime commercial areas in cities where land supply above ground is limited, giving it another leg up on the operators of traditional malls.

The offer by SJM Holdings to allow investors (both retail and institutions) to opt out of its $434 million IPO was somewhat different since that deal had already been priced and the new information consisted of a warning that there may be more potential legal challenges against the company which could have an adverse impact on the share price and even result in the stock being suspended from trading. Thus, the opt-out offer contained no positive element, like RenheÆs lower price, and the bookrunner also wasnÆt able to accept any new orders during the opt-out period.
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