Chinese biomedical producer Shanghai Haohai priced its Hong Kong initial public offering at the top of its range on Friday, raising HK$2.71 billion ($305 million) including the greenshoe. The company benefited from a combination of clear primary markets and strong secondary market momentum to achieve a premium valuation.
The 40 million primary share deal has had almost no competition from other Hong Kong IPO's and the secondary markets have remained firm despite speculation that concerns about the Ting Hai effect might become self-fulfilling. According to local lore, the stock market falls every time the TV series Greed of Man is shown in Hong Kong.
However, the re-airing of the show on Monday night failed to prompt a slide the following day when markets began to respond positively to pump priming measures by the People’s Bank of China, which had cut the reserve ratio requirement by an unexpectedly steep 100 basis points over the weekend. By Friday's close, the Hang Seng China Enterprises Index was up at 14,488.99, rising 20.89% since the beginning of the year and a more remarkable 21.77% since March 27.
This momentum helped to propel Shanghai Haohai’s retail offering, which closed 179 times oversubscribed, prompting full clawbacks to 50% of the overall deal.
Sole sponsor UBS closed the institutional book one day early on Wednesday to manage allocations. At this point, there were 170 lines in the book plus two cornerstone investors. One fund manager said it closed about six times oversubscribed.
The cornerstone tranche amounted to $55 million and was split between Prudence Investment Management, which took $30 million and Prime Capital on $25 million.
"Pricing was driven by long-only and China dedicated funds rather hedge funds," said one source close to the deal. "They were happy to pay for a premium valuation because Shanghai Haohai offers differentiation in the healthcare industry - a sector they're very keen on.
"The bottom 25% of the book received no allocation at all," he added. "Then there was a fat middle and not that much concentration at the top."
Pricing was fixed at $59 per share. There is also a 15% greenshoe, which adds a further six million shares.
Including the greenshoe, the company has issued 27.7% of its enlarged share capital, equating to a market capitalisation of HK$9.797 billion ($1.26 billion).
Listing will take place on April 30.
Valuation
At $59 per share the deal has been valued at 28 times forecast 2015 earnings of Rmb270 million ($43.5 million).
One fund manager told FinanceAsia he thought this was fairly full pricing compared to Shanghai Haohai’s main comparable, Bloomage Biotech. This may explain why valuation-sensitive institutional investors were not quite as enthusiastic as their more momentum-driven retail counterparts.
On Friday, dermatological sodium hyaluronate producer Bloomage Biotech, closed at HK$18.56. Based on Bloomberg’s consensus figures, this represents a forward P/E ratio of 23.29 times.
Unlike the rest of the Hong Kong market, the stock has been under some pressure since traders and investors returned from the Easter break, retreating from HK$18.9 on April 8 to a low of HK$17.14 on April 20, before bouncing back again.
However, while Shanghai Haohai has been priced at a premium to Bloomage Biotech it has come at a slight discount to US comparable Anika Therapeutics, which is trading at 27.55 times forward earnings.
Two key selling points are likely to have encouraged the company to price towards the top of the range.
Firstly, it operates in a sector favoured by investors - China’s healthcare sector, particularly orthopedics and ophthalmics. This means it is not only benefiting from rising consumption and healthcare spending on the mainland, but also the country’s aging population since its sodium hyaluronate injections and gels are used to treat age-related illnesses such as arthritis and cataracts.
This has enabled the company to record strong profit growth. Profits rose 24.2% to Rmb141.5 million in 2013 and by 29.7% to Rmb183.5 million in 2014.
This year UBS is forecasting 47% growth to Rmb270 million, boosted by the influx of the IPO proceeds. In 2016, it is forecasting 33.3% growth to Rmb360 million.
Between 2012 and 2014, the company was also able to increase its gross profit margin from 83.4% to 87.2% thanks to the launch of higher margin dermal fillers.
However, its net profit margin contracted over the same period from 37.6% to 35.6%. The company attributed this to higher marketing costs.
In addition, Shanghai Haohai has a strong market share across its main product lines, although as DBS points out in a research note, 92.4% of its 2014 revenues were from generic products, where competition is intense.
In its prospectus, the company said it had a 29.4% market share in intra-articular viscosupplements in China, second to Bausch and Lomb. These are orthopedic supplements particularly useful for osteoarthritis and comprised 46% of 2013 revenues.
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.
CCB International and CMB International are joint bookrunners alongside UBS.
