Renhe to extend offer, lower the price

The IPO fails to attract enough investors amid the sharp sell-off in global equity markets, but the Chinese operator of underground shopping malls plans to have another go at a lower price.
Renhe Commercial Holdings, which has hopes of becoming the first company to list in the Hong Kong market in the last two months, failed to attract enough investors to price the deal as scheduled on Friday. Sources familiar with the offering say the challenging market environment û the Hang Seng Index has fallen 20% since the official marketing began on September 29 - kept most international investors away and made it difficult for some of the Chinese investors who did submit orders to come up with the cash.

However, the Chinese operator of underground shopping centres has not given up its aim for a listing and the plan now is to reduce the offering price and to re-open the institutional book for about three days this week. While this means that the company wonÆt be able to raise the HK$4.2 billion ($540 million) that it was aiming for at the bottom of the initial range, assuming investors bite at the lower price it will still get its listing, which will enable it to return with a follow-own offering once the markets stabilise.

Assuming the Hong Kong stock exchange gives the revised offer the final go-ahead today, sources say Renhe will re-launch the initial public offering on Tuesday at a fixed price, which is expected to be somewhere in the range between HK$1.10 and HK$1.20 per share. The latest indications over the weekend were that it may end up at HK$1.13, although a final decision had yet to be made. If correct, this would be 19.3% below the bottom of the initial range of HK$1.40 and HK$1.71, but the severe drop in the valuations of other stocks over the past couple of weeks does suggest that this is a reasonable reduction. It also appears that many of the investors who may end up buying the stock may do so for relationship reasons, which makes it more likely that the company wants to ensure they donÆt lose a lot of money straight away.

Even at a lower price, there are no guarantees that the company will be able to complete the IPO, however. Most investors prefer not to commit money to equities at all while the global markets remain this volatile and the bookrunners will have to re-confirm that the investors already in the book want to stay in. If one assumes that every order in the book at the moment could be backed up by cash, there would have been enough demand to cover the base deal, although not the overallotment option, sources say.
However, the bookrunners are said to have secured a couple of anchor investors alongside Warburg Pincus, which has agreed to buy $50 million worth of shares as a cornerstone investor. These two investors may, together with the lower price, give the deal enough momentum to carry it home û although contrary to Warburg Pincus, which cannot sell its shares for six months, they will be free to get out at any time. This means there is no guarantee that they will continue to support the offering if the share price takes a tumble in the secondary market.

As the company re-launches the offer at a lower price, it will have to give retail investors a chance to pull out, an option that may seem quite attractive in light of the sharp fall in the broader market in recent days. Since the launch of the deal, the Hang Seng Index has plunged through first the 18,000 mark, and then in rapid succession 17,000, 16,000 and 15,000 for a close on Friday at 14,796 points. However, the retail tranche, which accounts for 10% of the total offering, is said to have been less than 15% subscribed, making this less of an issue.

The other terms of the deal will remain unchanged. The company is offering 3 billion shares, which account for 15% of the enlarged share capital. If launched on Tuesday, the offering will likely stay open until Thursday with allocations set to be confirmed by Friday. The trading debut is likely take place towards the end of next week. BOC International, HSBC, Morgan Stanley and UBS are the joint bookrunners.

This is the second time in a few months that a Hong Kong listing candidate has been forced to extend the offer period and give investors the option to cancel their orders. In July, SJM Holdings made a similar offer to both institutional and retail investors after the deal was already priced to give them a chance to digest the potential consequences of a legal challenge. However, the per share price on SJMÆs $494 million IPO remained the same and the bookrunners werenÆt able to add any new orders during the two days investors had to reassess their initial orders. As it were, more than 2,600 retail investors decided to withdraw their orders, which left the retail tranche only about half covered. The shortfall was covered by allocating the remaining shares to international institutions which then meant that the international tranche was undersubscribed by 102.87 million shares (about $41 million worth) û shares that Deutsche Bank as the sole underwriter had to buy to enable the listing to go ahead.

RenheÆs situation is different, however, and if it werenÆt for the unpredictable secondary market, one could envisage that investors who had already submitted orders at the higher price would also be willing to buy at the lower price. However, in the current market environment, all such bets are off.

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 landbank, but rather has operational rights for the facilities it builds for 40 years.

Among its key investment arguments are 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.

Renhe 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. It has also obtained the necessary approvals from the National Civil Air Defence Office for a further eight projects which will more than double its aggregate gross floor area and take Renhe another step towards its aim of becoming a nationwide player. However, its aggressive expansion plans bring a certain amount of execution risk û not least with regard to the completion timetable.

Assuming a price of HK$1.13, Renhe will be valued at 4.2 times the consensus syndicate earnings forecast for 2009 on a pre-shoe basis, and at 10.5 times the companyÆs own earnings forecast for this year of Rmb1.9 billion (HK$2.2 billion) on a fully diluted basis.
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