Renhe launches IPO, but Gintech holds off

Renhe kicks off its $540 million IPO and immediately runs into a tough challenge as US lawmakers reject the $700 billion bailout package. Gintech postpones its $150 million GDR for now.
After three weeks of investor education and pre-marketing, Renhe Commercial Holdings yesterday finally took the plunge and launched the institutional portion of its initial public offering with the aim to start trading in Hong Kong on October 15.

The Chinese operator and developer of underground shopping centres is the first company to attempt a Hong Kong IPO since China South Locomotive & Rolling StockÆs H-share trading debut on August 21 and the outcome of the deal will be crucial for whether other listing candidates in the pipeline will gain the confidence to follow suit.

The size of the offering has been reduced slightly more since the company started pre-marketing, which is a likely reflection of the drop in the overall stockmarket as well as the valuation of key comparables since then. It is now looking to sell between HK$4.2 billion and HK$5.13 billion ($540 million to $659 million) worth of shares, compared with a talked-about size of $600 million to $800 million three weeks ago. 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 it obtained a waiver to sell only 15% of its enlarged share capital (versus 25% originally).

The company is offering 3 billion shares at a price between HK$1.40 and HK$1.71, with 10% earmarked for Hong Kong retail investors. As usual, there is also a 15% greenshoe that could bring total proceeds to a maximum of $758 million. BOC International, HSBC, Morgan Stanley and UBS are the joint bookrunners.

Renhe decided to go ahead after US private equity firm Warburg Pincus agreed to support the deal as a cornerstone investor, buying HK$389 million ($50 million) worth of shares with a six-month lock-up. The investment will account for between 7.6% and 9.3% of the total deal size, which is small compared with the around 20% that was typically set aside for cornerstone investors in IPOs last year. Given the difficulty in getting investors to commit to lock-ups in the current volatile market, though, getting even one cornerstone on board is not a bad effort û especially a global name like Warburg Pincus.

Sources say there has also been good interest from Chinese corporates and China-focused funds during the pre-marketing and while this has yet to turn into actual orders, it is unlikely that the four bookrunners would have chosen to go ahead with the deal had they not been confident that they would be able get it out the door.

That said, the equity markets remain challenging to say the least as the financial sector turmoil on Wall Street continued to spook investors. Yesterday, as the US House of Representatives was getting ready to vote on the $700 billion bailout package, news emerged that Citi had agreed to buy Wachovia with some help from the Federal Deposit Insurance Corp (who will backstop the losses) and that Morgan Stanley had struck a deal to sell 21% of its equity to JapanÆs Mitsubishi UFJ Financial Group for $9 billion. And in Europe, no fewer than three lenders, including Fortis Bank, were given emergency life-lines to prevent them from going under.

Hong KongÆs Hang Seng index fell 6.3% during RenheÆs pre-marketing period and yesterday, as the listing candidate gathered together 200 investors for a lunch meeting with management, it lost another 4.3% and again dipped below 18,000 points.

Indeed, launching a deal now is gambling that investors will be willing to look beyond the short-term volatility and commit new money to the equity markets. Another slew of bad news and they can easily choose to walk away. And not everyone is willing to risk that. The stakes were raised further over night as the House did not pass the bailout bill, sending stocks on Wall Street into a tailspin. With one hour left of the session, the Dow Jones index was off 5.2% and Nasdaq had plunged 7%.

Taiwanese solar cell manufacturer Gintech Energy Corp, which has been on the road since September 17 marketing a planned sale of global depositary receipts (GDRs), over the weekend decided not to go ahead and open its books on the final day of the roadshow yesterday because of the jittery market environment.

Gintech is aiming to raise about $150 million through the sale of 30 million GDRs to repay loans and to fund raw material purchases, but its current approvals are valid for another six weeks and after that it can apply for a three-month extension, which gives it quite a lot of flexibility on when to launch the deal.

One source notes that having already met with about 80 investors in Asia, Europe and the US increases that flexibility even further as it enables joint bookrunners Royal Bank of Scotland and UBS to make use of any potential window in the market that may open up. With the investor education done, all they need is a one-day opening to complete the bookbuilding.

ôThe feedback wonÆt change, but the markets will,ö says the source, who notes that investors have few concerns about the company itself, but are under real pressure from the current volatility.

Case in point, GintechÆs share price fell 3.6% over the nine-day roadshow as a whole, but fluctuated between a closing low of NT$162 on the second day and a high of NT$189 mid-last week û a span of 17%. The stock reached a closing high of NT$311 on May 11 û a record since it began trading on the Taiwan Stock ExchangeÆs main board in early November 2007.

Back to Renhe, it too is trying to limit the price risks by keeping the bookbuilding process short. It is doing that by opening the books for retail investors today û only one day after it started accepting orders from institutional investors. However, the retail offer will be open for four-and-a-half days, compared with the usual three-and-a-half, although this may be due to the fact that the offer period runs across two public holidays in Hong Kong û tomorrow and next Tuesday.

As a result, the retail offering will close on October 8, while the institutional tranche will stay open until October 9, with the price set to be fixed after the US close on that day.

The price range values Renhe at 13 to 15.8 times the companyÆs own earnings forecast for this year of Rmb1.9 billion (HK$2.2 billion) on a fully diluted basis. Given that we are almost into the fourth quarter though, most investors are looking ahead to 2009 when expectations of further strong profit growth will push down the price-to-earnings multiples significantly. Based on the consensus syndicate estimates, the current price range translates into a 2009 P/E multiple of 5.2 to 6.3 on a pre-shoe basis.

The company has no immediate competitors as it 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 û rather the main part of its revenues comes from leasing and sales of shop units in its underground malls. However, a pickup or slowdown in retail sales over time will undoubtedly have an impact on the demand for shops at its premises and thus on the leasing price.

At the same time, Renhe isnÆt legally classified as a developer since all its malls are built as civil air defence shelters (the government can take them over and use them as such at times of war) 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 addition, it doesnÆt own any landbank, but rather has operational rights for the facilities it builds for 40 years.

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. It opened its first underground shopping centre in Harbin in 1992 and now has three interconnected malls in that city and one in Guangzhou, as well as two malls under development in Zhengzhou and Shenyang which are scheduled to be opened for business in October and December this year. These six malls span a combined gross floor area of 374,000 square metres. It has also obtained the necessary approvals from the National Civil Air Defense Office for a further eight projects with an aggregate gross floor area of about 980,000 sqm. These approvals will add four new cities to its list of projects and take Renhe another step towards its aim of becoming a nationwide player. However, the aggressive expansion will bring a certain amount of execution risk û not least with regard to the completion timetable.

High earnings growth and its impressive margins, which are a direct result of its favourable tax treatment and the fact that it doesnÆt have to pay for the land it uses, are among the key selling arguments. 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.

The net profit margin has widened to about 74% in 2007 from 18% in 2005 and is expected to stay between 50% and 60% over the next couple of years. The Rmb1.9 billion net profit projected by the company for this year represents an increase of 614% over last yearÆs Rmb266.7 million and if the company is able to complete the six new malls that it is planning for 2009, syndicate analysts estimate that the net profit will exceed Rmb5 billion that year.
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