Shanghai Pharma raises $2 billion from Hong Kong listing

China's second-biggest drug distributor prices its H-share offering below the mid-point, but at a modest 2.4% discount versus its A-shares.

Shanghai Pharmaceutical on Friday completed the largest initial public offering in Hong Kong this year after fixing the price below the mid-point of the range at HK$23. This allowed the company to raise HK$15.3 billion ($2 billion), which shows that investors are willing to look beyond the rather nervous trading in other recent IPOs and invest in what they consider high-quality stocks.

Shanghai Pharma is an integrated producer and distributor of pharmaceuticals in China and the second largest drug distributor behind Sinopharm and hence offers good exposure to China’s rapidly growing healthcare industry — a sector where there aren’t that many large and liquid stocks to invest in. The company already has A-shares listed in Shanghai, but since these are only available to foreign investors on a very limited scale, the H-share listing in Hong Kong attracted quite a bit of attention.

There was good demand from long-only funds, and perhaps more surprisingly, retail investors showed renewed appetite despite the poor performance of several recent offerings. Indeed, the retail portion of the deal received enough orders to trigger an automatic increase of this tranche to 7.5% from the initial size of 5%.

The interest for Billion Industrial Group, a second Hong Kong IPO to close last week, was a lot less enthusiastic, although this deal too priced above the bottom of the range. According to sources much of the demand for Billion came from corporate and strategic investors and from the type of buyers often referred to as “friends and family”. Financial investors were said to have thought the valuation was too expensive.

Billion, a developer and manufacturer of polyester filament yarns that are used in a number of consumer products, including apparel, footwear and home furnishings, raised HK$2.98 billion ($383 million) after fixing the price at HK$5.18 per share. The price is in the lower half of the indicated range of HK$4.53 to HK$6.08 and was set with a nod to Billion’s debut trading date on May 18.

The strategic nature of the demand for Billion was suggested in the cornerstone tranche as well. Among the three investors was Ding Wuhao, president of sportswear company 361 Degrees, which according to Billion’s prospectus is among a group of apparel and footwear manufacturers that are requesting their suppliers of fabrics and textiles to be made from Billion’s polyester filament yarn. Ding bought HK$100 million of the shares.

Also investing as cornerstones were SD Family Fund, a fund controlled by the family of Hengan International Group CEO Hui Lin Chit, and a company owned by Chim Wai Kong, chairman of Hong Kong-listed Costin New Materials. These two bought $10 million worth of shares each, bringing the total to about HK$255.4 million, or about 8,6% of the deal.

By comparison, Shanghai Pharma attracted a high-profile group of cornerstone investors that were both financial and strategic in nature, including Temasek Holdings, which invested $300 million. Malaysia’s Guoco Group bought $150 million worth of shares, while Pfizer, the world’s largest drug maker, and Bank of China invested $50 million each. Their combined investment of $550 million accounted for 27.5% of the total offering.

Sources said the institutional tranche was about three times covered at the final price and attracted about 250 investors, many of them global funds. The retail tranche was about 16 times covered, just above the 15 times needed to trigger a clawback.

Aside from the company’s strong market position, investors also liked the large size of the offering, which suggests the stock should be quite liquid — an important consideration at times like these when the secondary market is highly volatile. At $2 billion it is more than twice the size of aluminium producer China Hongqiao Group’s $822 million IPO in March, which ranked as the largest listing in Hong Kong this year before Shanghai Pharma. This also makes it an important benchmark for several other large deals that are set to launch this week, including Macau casino operator MGM China and Australian mining company Resourcehouse, which are expected to seek up to $1.5 billion and up to $3 billion respectively. Shanghai Pharma’s trading debut on Friday will be keenly watched for signs that the sentiment towards IPOs is improving.

The final price of HK$23, equals a 2011 price-to-earnings multiple of about 28 times post-money, which translates into a discount of about 18% versus Sinopharm. The discount versus Shanghai Pharma’s A-shares was only 2.4%, based on the Rmb19.72 closing price last Thursday. Source said the A-share price was a bit of a psychological point, but since you cannot really arbitrage between the two stocks, the discount wasn’t that big a focus. The A-share price fell 1% during the roadshow.

Shanghai Pharma sold 25% of its enlarged share capital in the form of 664.2 million new H-shares. There is also a 15% greenshoe, that could increase the size of the offering to as much as $2.3 billion if fully exercised. The shares were offered at a price between HK$21.80 and HK$23.

China International Capital Corp, Credit Suisse, Deutsche Bank and Goldman Sachs were joint bookrunners.

Meanwhile, Billion offered 574.75 million new shares plus a 15% greenshoe. The final price valued the company at about 11.6 times its 2011 earnings. Most of the institutional demand was said to have come from Asia, although there were a few small orders from Europe. The retail tranche was about 1.5 times covered.

The deal was led by CCB International and UBS.

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