Retail investors bid up Poly Culture

China's answer to Sotheby's and Christie's raised $331 million ahead of its Hong Kong IPO, with shares being priced at HK$33 a share, the top end of the range.

Retail investors have clamoured to get a piece of Poly Culture Group, China's largest art auction house, which will hold an initial public offering in Hong Kong on March 6.

Poly Culture, China's answer to Sotheby's and Christie's, raised $331 million on Friday ahead of the IPO, with shares being priced at HK$33 a share, the top end of the range.

Pre-marketing began last week with roughly 77.8 million shares on offer, representing 33% of the enlarged capital. Shares were initially offered at HK$28.20 and HK$33, with the final pricing putting the company's valuation at 17 times its 2014 P/E forecast.

Poly Culture secured the National Social Security Fund (NSSF) as the sole cornerstone investor, with the government-controlled investment fund pledging $20 million to the company.

The retail segment was oversubscribed by 605 times, according to a banker close to the deal. This led the company to exercise its greenshoe option and raise an additional $50 million.

"Demand was very strong. We describe it as 'very heavily oversubscribed,'" the banker told FinanceAsia, noting there were more than 300 participants in the deal.

"Because the retail tranche is oversubscribed by more than 100 times, the full clawback for retail [was implemented] and represents 50% of the total bill," the person said.

Poly Culture, part of the $61 billion state-run China Poly Group Corporation, has three businesses - an auction/art unit; a performance and theatre management division; and a cinema segment.

The majority of its profits come from the auction house, which accounts for 87% of EBITDA, while the theatre division makes up 7% and cinema, 6%.

Poly Auction acts as an agent, accepting artwork on consignment, measuring market demand through marketing and matching sellers (consigners) to buyers (bidders), through auctions or private sales.

It's also an investment advisor, providing services on authentication, valuation, purchase and sales of artworks. Clients include "well-known domestic and overseas collectors or families", according to a company prospectus.

Poly Culture plans to use 50% of the proceeds to further develop its art and auction segment, 25% for its cinema unit and 15% for data management.

The remaining 10% will be used for general corporate purposes. Expanding its auction presence overseas is a priority, with the company noting in its prospectus it is focused on finding "regions where it can find large numbers of high value Chinese artworks, such as the United States, Japan and Europe".

But the company may have grander aspirations. Jiang Yingchun, Poly Culture chief executive, noted during a press conference last week that, although Poly Culture is "big in the art auction market in mainland China, [it] still has a long way to go to become the biggest auction house worldwide", according to media reports.

Before becoming the world's largest auction house, however, the near-term outlook appears bright. The strong pre-IPO demand suggests retail investors believe the rising affluence in the country will lead to success for the auctioneer after it lists.

The number of Chinese high-net-worth individuals will hit 840,000 in 2013, surpassing 700,000 in 2012, according to the China Private Wealth Report 2013, jointly published by Bain & Company and China Merchant's Bank.

These newly rich mainlanders are spending more money on luxury items: a Julius Baer survey in June notes that Chinese now view designer clothes, vintage wines and botox as "a way of life and not just the occasional purchase of a good or service".

Stable financial markets permitting, art sales should follow.

Poly Culture's auction division recorded a turnover of HK$989.1 million ($127.5 million) in its 2013 autumn auction, a 91% rise over the autumn auction one year ago. "Based on these factors, we are of the view that the art auction turnover in China will keep improving in 2014," the prospectus said.

It is a view held not only by Poly Culture but also Sotheby's and Christie's, both of which have recently expanded into China - Sotheby's through a September 2012 partnership with Beijing Gehua Art Company to form Sotheby's (Beijing) Auction Co, while Christie's independently set up operations in the mainland, becoming the first foreign auction house to do so.

In addition, Poly Culture's main local competition, privately-held China Guardian, is rumoured to be considering its own IPO, according to media. "A lot of [mainland artifacts] went overseas, and it's just now making its way back to China," the person close to the deal told FinanceAsia. "China wants its art back and calligraphic art is shifting back."

In addition to rising affluence, recent government initiatives, such as the "Doubling Plan for the Culture Industry", aim to achieve total art trading turnover of Rmb200 billion ($32.5 billion) in China by 2015.

This should, in theory, support auction houses such as Poly Culture.

However, total art auction turnover in China, including Hong Kong, hit Rmb85.7 billion ($13.9 billion) in 2011, the prospectus said. But turnover fell to Rmb57.6 billion in 2012 and was Rmb26.6 billion for the first six months of 2013, as worries over the country's high debt levels dampened appetite.

Nevertheless, it doesn’t appear to have soured investor sentiment before shares start trading on March 6. “It's been well received by all types of investors," the person said. "There's definitely been [optimism] around the auction market. [The main driver] is the rising affluence."

Shares in Sotheby's, Poly Culture's closest listed competition, is down 6% this year to February 28 but rose nearly 58% in all of 2013.

Through its theatre business, Poly Culture operates 31 high-end theatres, each with a seating capacity of over 1,000 in 29 cities across China. It has four threatres currently under construction. It also has 17 cinemas in nine cities in China, and has entered into agreements and signed MoUs for an additional 25 cinemas across the mainland. Citic Securities International acted as sole sponsor, and CLSA as the sole bookrunner.

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