Sino Gold in particular is coming to market at a good time, as the recent pickup in oil prices has led to a return of inflation concerns that has sent gold prices higher in the past few days. Technically, the offering from the Australia-based gold miner, which has all its operations and assets in China, isnÆt an IPO as the stock is already listed in Sydney. However, the deal has many of the characteristics of an IPO and this will be the first time the companyÆs shares are offered to Hong Kong retail investors.
The company is looking to raise about $125 million, although the final deal size may change as the offering will be priced off the back of the Sydney-traded stock. Common practice for follow-on offerings through American or Global Depositary Receipts suggests that the price will end up somewhere within a zero to 10% discount to the underlying stock, but the bookrunners havenÆt given investors any guidance on this so far.
Before the launch of the Hong Kong retail offering on Monday, March 5, they will provide a maximum price, but this will be set high enough to allow for some potential upside in the quite volatile stock during the bookbuilding and the intention isnÆt really for it to be used, sources say, noting that this will be similar to how it was done when Standard Chartered Bank listed in Hong Kong in 2002. As always, retail investors will pay the maximum price when applying for the offering, however.
Having fallen 10.3% on Wednesday, Sino GoldÆs share price in Sydney jumped 5.8% to A$7.63 yesterday and over the past six trading sessions it has risen 9%. Being a pure gold mining play, the stock does follow the direction of spot gold prices quite closely and since the beginning of October last year it has gained more than 90%.
The other listing candidate is Intime Department Store (Group), which currently operates five department stores in the Zhejiang province, including two in Ningbo and one each in Hangzhou, Jinhua and Wenzhou, with a focus on the medium- to high end of the retail market.
Like for the other two Hong Kong-listed Mainland department store operators, Parkson Retail Group and Golden Eagle Retail Group, growth will come primarily from new store openings and Intime is planning to open more than 10 new department stores in Zhejiang within five years. In addition to that, it is looking to ôactively expandö in selective cities outside its home province where it believes it can be a market leader either through opening new stores of its own or by acquiring companies with a leading position in their markets.
The company has recently set up a joint venture with KoreaÆs leading department store operator Lotte Shopping to jointly operate a department store in the Wangfujing shopping area in Beijing. That store is expected to start operations in 2008.
Intime also holds 29.9% and 22.6%, respectively, of two A share listed department store operators û Baida Group and Wushang Department Store Group û and according to sources the expectation is that Intime will eventually increase its stake and take control of these businesses as well. Baida operates one department store next to IntimeÆs own store
In Hangzhou, while Wushang has five stores in the Hubei province.
The company is looking to raise up to HK$2.34 billion ($300 million) from the sale of 450 million new shares, or 25% of the company, at a price between HK$4 and HK$5.20. There is also a 15% greenshoe that will be all secondary shares sold by private equity firm Warburg Pincus which currently holds 35% in the company. That will fall to 26.3% following the IPO and if the greenshoe is exercised in full to 22.5%. In case of the latter, the total proceeds from the offering will increase to $345 million.
Investors who attended IntimeÆs lunch presentation in Hong Kong yesterday say they would buy the newcomer at a slight discount to Golden Eagle, which currently trades at a 2007 price-to-earnings multiple of just over 29 times. And indeed the indicative price range does value Intime at about 21.5 to 28 times projected earnings for this year, according to sources.
The bottom line is expected to increase about 60% this year from an estimated Rmb205 million ($26.5 million) in 2006, they say. This would come on the back of 50% growth in 2006 and 46% in 2005.
Golden Eagle and Intime are seen as quite similar to one another as both have a regional focus, while Parkson is seen to be in a little bit of a different league given its nationwide presence. Its parent company also has a number of stores outside the listed company which are expected to be injected into the listco at some point, providing a potential earnings kicker. Most analysts therefore agree that it deserves a premium to the other two. As of yesterdayÆs close it was quoted at about 32 times forecast earnings.
ParksonÆs stock has also had a spectacular run since its IPO in November 2005, rising 376%. Golden Eagle is up a more modest, but still very respectable, 87% since its trading debut in mid-March 2006. Investors will be hoping for Intime to replicate these success stories which are supported by ChinaÆs rapid economic growth and the increasing wealth of a growing middle class. Retail sales expended by 14% last year.
Given its aggressive expansion plan, there are execution risks involved, however, especially when it comes to opening stores outside its home province where it will invariably have less contacts with the local government and may find it harder to secure good locations. One analyst estimate that the break-even for opening another store in a market where you are already active to 12-18 months, but says this could jump to as much as three years when moving to a different market..
ôBut the department store business is an attractive space to be in, especially if you are in the high end of the market,ö the analysts says. ôSince the operators rely heavily on concessionaire sales itÆs quite a low-risk business.ö
Gold mining may not be quite as low risk, but being the first non-Chinese company with concessions and mining rights in a country that is the fourth largest gold producer in the word does put Sino Gold in a good position, observers say.
The company is offering 21 million shares, or 13% of its existing share capital, of which 90% will be primary shares. The remainder will be sold be two directors, including President and CEO Jacob Klein, who will sell about 27% of his current holdings, and by the International Finance Corp, which will offload 888,000 shares or about half its stake in the company. There is a 15% greenshoe that could bring the Hong Kong freefloat to 15% at the time of listing.
The Hong Kong-listed shares will be fully fungible with its stock in Australia, however, which means they are likely to trade close to one another in terms of price, limiting the opportunities for arbitrage. Otherwise the same conventions apply as for a normal Hong Kong IPO with a 90/10 spilt between the institutional and retail tranches and a potential to increase the retail offering to 50% of the deal in case of strong demand.
The company is targeting the Hong Kong market in the hope of creating a more liquid market in its stock by having it trade closer to its operations. Sino Gold is currently also trading at a discount to Mainland gold miners Zijin Mining and Zhaojing Mining, which are both listed in Hong Kong. And this is a discount it hopes to eliminate.
Based on yesterdayÆs closing price, Sino Gold trades at about 19.9 times 2008 earnings, compared with 22.2 times for Zijin and 24.6 times for Zhaojin. The third gold play in Hong Kong, Lingbao Gold, is more of a processor with a smaller part of its revenues coming from actual mining. Meanwhile, Zijin and Zhaojin are both involved in the mining of other metals, including copper, making Sino Gold the only pure gold mining play on the Hong Kong exchange, observers note.
The key growth driver going forward will be the start of commercial operations at the companyÆs Jinfeng mine in Guizhou province towards the end of March. The mine, which is 82% owned by Sino Gold and 18% by a local partner, will be the second largest gold mine in China with an annual production capacity of 180,000 ounces and estimated resources of 4 million ounces.
It is also currently doing exploration work at its White Mountain mine in the Jilin province, where it has found an initial gold resource of 846,000 ounces. Sino Gold owns 95% of this mine and currently expects to be able to bring it into production towards the end of 2008.
Aside from these two projects, the company has 9 other mines through joint venture in which they hold between 60% and 95%.
Potential investors will be encouraged to see that South African miner Gold Fields took a 17.2% strategic stake in Sino Gold as recently as in November, having decided that this was the best way for it to become involved in the China market. Goldfield will be providing technical expertise and personnel to Sino Gold in exchange for 50-50 development rights in any future Sino Gold mining project with reserves of at least 5 million ounces. Neither Jinfeng nor White Mountain are affected by this agreement.
The books will close on Thursday next week (March 8) and the final price will be determined on the same day.
Intime will launch the Hong Kong retail tranche on March 7 and close the books on March 12. The trading debut is scheduled for March 20.
Morgan Stanley is the sole bookrunner for both deals, which may help it progress a notch or two in the Asia ex-Japan ECM league tables. It currently ranks fourth with a market share of 7.4%.