Silver Base prices IPO at the top

Chinese liquor distributor Silver Base Group on Friday priced its initial public offering at the top of the range after a strong secondary market gave investors the confidence to buy in. The final price of HK$3.45 per share enabled the company to raise HK$1.03 billion ($133 million), putting it exactly on par with Real Gold Mining as the largest Hong Kong IPO this year.

Real Gold's share price initially fell after its February 23 debut and at one point was trading as much as 28% below the IPO price. However, it has been clawing its way back in line with the rebound in the broader market and on Friday closed at HK$5.87 -- only 6% below the issue price -- which would have added further to the willingness to invest in yet another newcomer. The Hang Seng Index gained 13.3% between the start of Silver Base's limited pre-marketing on March 23 and the close of the order books last week.  

Meanwhile, there was pent-up demand among investors as aside from Real Gold there have been no other IPOs of size in Asia since Renhe Commercial Holdings completed its Hong Kong listing in October at a reduced size of $435 million.

Hong Kong retail investors are also familiar with Silver Base's main product, a popular brand of white spirits, or baijiu, that goes by the name of Wuliangye. And at the end of the bookbuilding retail investors had committed 43 times the number of shares initially set aside for them, forcing a clawback of shares from the institutional tranche that increased the retail portion of the deal to 30% from the original 10%.

The institutional tranche, which was said to have been covered at the bottom of the range by friends and family-type orders when the bookbuilding started last Monday, also gained momentum and, when the books closed early morning Hong Kong time on Friday, the deal was multiple times covered. One source says more than 100 investors were interested in participating in the offering and many of the institutions that had put in limited orders changed them to strike once they heard that the deal was likely to price at the top.

Institutional investors, who could still place orders during US trading on Thursday, also had the benefit of seeing Chinese online gaming operator Changyou.com pull off a very strong trading debut on Thursday. The stock gained 25% on the first day to $20.02 after fixing the price of its IPO at the top of the $14 to $16 range.

At $120 million, Changyou.com was still a small deal, however, and observers say that while it and Silver Base may give other IPO candidates the confidence to launch their own trades, both these companies were successful for quite specific reasons- - Changyou.com because it is a spin-off from well-known portal operator Sohu.com and Silver Base because of the Wuliangye brand. The IPO market still needs to see a deal of about $500 million to $1 billion to provide a real test of investor sentiment, they say. In the meantime, everybody will be watching Silver Base's trading debut on Wednesday.

Silver Base offered 300 million H-shares, or 25% of the company, plus a 15% greenshoe that may boost the total deal size to HK$1.19 billion ($153 million). The price was offered in a range between HK$2.30 and HK$3.45 and fixed at the top.

The final price values the company at between 7.6 times and 9 times the projected earnings for 2010, based on estimates from joint bookrunners BOC International and UBS. There is no other listed liquor distributor to compare Silver Base to, but the Wuliangye A-share is trading at around 22 times its estimated earnings for 2009.

Silver Base has a strong market position as one of the largest distributors of Wuliangye, which accounts for 95% of its revenues. The remaining 5% comes from cigarettes and the distribution of Dimple Scotch Whiskey for the Diageo Group. It has been selling the product to the international market, including Hong Kong, since 1997 and in China since 2006. China was the world's largest spirits market in 2007 with a 19.5% share of global sales. And while traditional drinks, such as baijiu, make up only 12% of the sales volume, they account for 50% of the sales value. And while the financial crisis has had an unfavourable effect on the market, this is a relatively defensive industry and the general trend since 2003 has been that the number of loss-making liquor companies has fallen sharply. Silver Base is expected to report a 16.5% revenue increase to HK$1.5 billion ($192 million) in the 2010 financial year, which starts on April 1, while core net profit is expected to rise by 10%.