Shanghai Haohai fixes price range for HK IPO

Chinese small cap hopes to benefit from mainland money pouring into Hong Kong bourse as formal bookbuilding opens for its $250 million to $304.5 million float.

Formal bookbuilding opens on Wednesday for a HK$1.94 billion ($250 million) to HK$2.36 billion ($304.5 million) initial public offering by biomedical materials producer Shanghai Haohai.

The IPO was launched on an accelerated schedule one week ago to take advantage of the surge of money entering Hong Kong's stock market following an announcement that Chinese mutual funds will be allowed to participate in the Shanghai-Hong Kong Stock Connect programme. The company and its sole sponsor UBS hope this momentum will continue despite Tuesday's pullback when Hong Kong's main stock indices retreated after eight straight sessions of gains. 

The Hang Seng China Enterprises Index closed down 2.23% at 4,264. But many research houses believe it will be a temporary respite given the valuation gap that still exists between the A and H share markets. 

Shanghai Haohai fixed its price range at HK$48.50 to HK$59 per share with a 40 million share base deal size and 15% greenshoe. Both the base deal and greenshoe comprise primary shares, with proceeds being used to expand capacity at the company's factories in mainland China. 

This equates to 25% of the company's enlarged share capital pre greenshoe and a market capitalisation of $1 billion to $1.218 billion. 

There is a standard split with 90% being allocated to institutional investors and 10% to retail investors subject to clawbacks. One source close to the deal said two cornerstone investors have been signed up and will take about $55 million of the deal between them. 

However, the cornerstone tranche has been deliberately kept small given the market's strong underlying tone and the likelihood of heavy retail oversubscription. 

Valuation

At HK$48.50 to HK$59 per share, Shanghai Haohai is being pitched on a p/e ratio of 23 to 28 times forecast 2015 earnings of Rmb270 million ($43.5 million). At the mid point of the price range this represents a 9% discount to the mid point of the lead manager's fair value estimates, which span 24 to 32 times 2015 earnings. 

Shanghai Haohai's two nearest comparables both traded down heavily on Tuesday, bucking the overall performance of the A-share market, which hit a new seven-year high. While the Shanghai Composite Index closed up 0.34% at 4,135.57, dermatological producer Bloomage Biotech fell 4.35%. 

Fellow comparable Grandhope Biotech also dropped 5.85%. But the Guangdong-based company, which produces regenerative medical materials such as orthopedic implants, has had an extremely strong run and is up 67.9% since January 5. It is currently trading at 167.28 times consensus 2015 earnings. 

Bloomage Biotech is trading at 23.4 times and has jumped 64.3% since the middle of March. Both Bloomage and Shanghai Haohai are valued at a slight discount to global comparables such as Nasdaq-listed Anika Therapeutics, which is currently valued at 29 times consensus 2015 earnings. 

Sector specialists, global long only and domestic Chinese funds are all said to have been attracted to the deal. Aside from the fact that it operates in the favoured health care sector, investors are likely to be drawn to its growth profile, dominant market share and wide distribution network among China's public sector hospitals.

Niche operator

Shanghai Haohai manufactures sodium hyauloronate and associated products, which are used either as an injection or gel in a range of pharmaceutical and medical procedures.

It has a 29.4% market share in intra-articular viscosupplements in China, second to Bausch and Lomb. These are orthopedics supplements particularly useful for osteoarthritis and comprised 46% of the company's revenues in 2013.

Its second strongest revenue stream comes from anti-adhesives, contributing 31.1% of revenues in 2013. In this sector, Shanghai Haohai has a dominant 50% market share. 

Its third revenue stream comprises opthalmic viscoelastic devices, which are used in cataract surgery. In this sector it has a 39.6% market share. 

Sole sponsor UBS believes the company will maintain a strong growth trajectory given the Chinese government's clear preference for domestic device manufacturers over their foreign rivals. It is forecasting a 33.3% increase in net profits between 2015 and 2016. 

Pricing for the IPO is scheduled for April 23, with listing on April 30. 

 

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