Chinese IPO

Shanghai Pharma braves weak market with $2.2 billion IPO

Shanghai Pharma's IPO beats the odds to find good demand in difficult market conditions.
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China's healthcare market has doubled during the past five years</div>
<div style="text-align: left;"> China's healthcare market has doubled during the past five years</div>

Shanghai Pharmaceuticals Holding kicked off bookbuilding for a $2.2 billion (HK$17.27 billion) initial public offering in Hong Kong yesterday, despite a lukewarm primary market.

The company, one of China’s leading drug distributors, provides rare access to the country’s vast healthcare market — a fact that helped drive demand on the first day of the roadshow, according to sources close to the deal, who said that good quality orders flowed in steadily yesterday.

Investors are betting that Chinese healthcare firms are set to benefit from the country’s growing economy, surging disposable income and aging population.

China’s healthcare spending grew to Rmb1.7 trillion ($260 billion) in 2009, up from Rmb866 billion in 2005, according to the China Health Statistics Yearbook 2010, and the country’s workforce is aging rapidly after three decades of the one-child policy. A national census last week revealed that the over-60s now make up 13.3% of the population, up by 3 percentage points from 10 years ago.

Such factors help to make a compelling story for Shanghai Pharma, but the company is also relying on a $550 million cornerstone commitment from four investors. Temasek, the Singapore state investment firm, has agreed to invest $300 million, and Guoco Group, a banking and financial services provider, will take $150 million. Pfizer, the world’s biggest pharma company, and Bank of China Group Investment are each putting up $50 million.

Shanghai Pharma will be grateful for the support of those investors given the unfavourable market conditions. Last week, Hui Xian Real Estate Investment Trust stirred up the market with Hong Kong’s first renminbi-denominated IPO, but the stock fell 9.4% below its issue price on the trading debut. Curtain-wall designer Yuanda also trimmed its IPO size over the weekend on weak demand.

Shanghai Pharma’s smaller domestic competitor China NT Pharma raised $208 million in a Hong Kong IPO last month by selling 357 million shares at HK$4.54 each, the bottom end of an indicated price range. The stock has fallen nearly 30% so far and ended at HK$3.19 yesterday.

Shanghai Pharma, which is already listed in its home town, is selling a 25% stake, or 664.2 million shares, at HK$21.8 to HK$26 each, which suggests the company could raise between HK$14.47 billion and HK$17.27 billion.

Based on the company’s 2011 forecast earnings, the price range translates into a price-to-earnings multiple of 25.8 times to 30.7 times, pre-shoe. That represents a roughly 20% discount to Shanghai Pharma’s biggest competitor, Sinopharm, a source said.

Shanghai Pharma’s A-shares traded at an average price of Rmb20.55 during the past three months with a 2011 P/E of 21 times, according to data from Bloomberg. The company suspended its A-share trading on April 29.

The offering comes with a 15% greenshoe option, which, if fully exercised, will allow the company to raise up to HK$19.8 billion by issuing an additional 99.6 million primary shares.

The company made a net profit of Rmb1.36 billion in 2010, nearly double the Rmb697 million it made in 2008, according to an IPO prospectus. It plans to use the proceeds to buy drug-making businesses and to expand its distribution network.

CICC, Credit Suisse, Deutsche Bank and Goldman Sachs are managing the deal.

¬ Haymarket Media Limited. All rights reserved.
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