The deal met with strong demand from both institutional and retail investors so the pricing came as no surprise. But if there were any lingering concerns that the subprime lending crisis in the US could still derail the wave of Hong Kong IPOs this month, they ought to have been written off by now.
Not only did Sino-Ocean and smaller listing candidate Qunxing Paper see virtually no price sensitivity on their respective offerings, but Chinese coking coal miner Hidili Industry International Development, which is the first listing candidate of size to complete a Hong Kong IPO after the August correction, also surged 77% in its trading debut Friday.
HidiliÆs strong first day may be partly a result of the price range being set when the market was still quite bearish while the trading debut came when it had turned bullish again. Still, the buying frenzy does suggest that investors are again comfortable to pay high valuation multiples for companies they believe are well positioned for future growth, and that the greater IPO discounts that were initially expected to be necessary to garner interest in the deals are no longer needed.
Sino-Ocean is a case in point. According to sources, the Beijing-based residential developer became only the second Mainland property company to price an IPO at a premium to its net asset value, based on the blended NAV estimates from the three bookrunners û BOC International, Goldman Sachs and Morgan Stanley.
The premium is a modest 2.2%, but even so it points to increasing investor confidence. Or perhaps investors chose to look at Morgan StanleyÆs post-money, but pre-shoe, NAV estimate, which sources say translated into a less aggressive valuation of an 18.3% to 6.9% discount to NAV. These same sources say it was primarily GoldmanÆs numbers that pushed the blended valuation to a premium.
Before Sino-Ocean, the only developer to sell shares above par during its IPO was Country Garden, which achieved a 12% premium to its end-2007 NAV. The Guangdong-based developer, which has a larger land bank than any of its peers and specialises in building landscaped village-style residential hubs targeted at middle-class home buyers, came to market in April.
On a price-to-earnings basis, Sino-OceanÆs final price is equal to 16.1 times its 2008 earnings, again based on the consensus forecast by the three bookrunners. On average, Hong Kong-listed Mainland developers trade at a 2008 P/E multiple of about 20 times and at an 11% premium to their current NAV, property analysts say.
Sino-OceanÆs retail offering attracted more than $100 billion in demand even though the institutional book closed a day earlier than planned. The 10% retail trance ended up about 205 times covered and triggered a full clawback. The issuer had sought and received a waiver that limited the size of the retail tranche to 20% even with a full clawback, however, compared with the usual 50%.
Another 16% of the deal went to 10 cornerstone investors and after deducting this, the remaining institutional tranche (including the greenshoe) was 80 times covered, sources say. About half the demand was said to have come from Asia with the rest split fairly evenly between Europe and the US. More than 700 institutional investors came into the book.
The company sold 30% of its enlarged share capital, or 1.51 billion shares, of which 84.5% were new. Including the 15% over-allotment option, the deal could increase to up to $1.76 billion.
Sino-Ocean was established in 1993 as a real-estate subsidiary of the Cosco Group, which is supervised directly by the central government, and in 2002 brought in the Sinochem Group, which is another large SOE, as a second major shareholder. In 2006, the company was restructured as a red-chip and six financial investors bought a combined 30% stake. These included Morgan Stanley, Standard Chartered Bank, Merrill Lynch Credit Suisse and two domestic investment funds.
Neither of the financial investors sold shares in the IPO, but Sinochem offloaded part of its stake, leaving it with 15% post-IPO. Cosco will still hold 21.6%.
Sino-Ocean was snapped up primarily because of its unique focus on the so called pan-Bohai Rim, which is expected to become the next zone in China to see substantial economic growth thanks to extensive government support. The listing candidate has more than 90% of its assets in this region in the Northeast of the country, which includes Beijing as well as major second tier cities Tianjin, Dalian and Shenyang in the northeast of the country.
In 2005-2006 the pan-Bohai Rim recorded 14.3% growth in disposable income, which was higher than the 13.6% in the Yangtze River Delta and the 7.6% rise in the Pearl River Delta, suggesting strong growth momentum. This is expected to result in property prices rising faster in this region than in other areas in China.
While still at the early stages, several Hong Kong tycoons and property companies seem to believe in the potential of this ônewö region as they have agreed to come into Sino-OceanÆs IPO as cornerstone investors with a one-year lockup. Among the 10 investors who bought a combined $240 million worth of shares on this basis are Henderson Land DevelopmentÆs chairman Lee Shau Kee, property firm HKR International, the Kwok family, which controls Sun Hung Kai Properties and a privately held property investment company called Caricom that wasnÆt further identified.
The other cornerstones were China Life Insurance, the Government Investment Corporation of Singapore, hedge fund Och-Ziff, a unit of Bank of Communications, Fidelity Insurance and transport and Mainland-based transport and logistics firm Sinotrans.
According to various banking sources, Sino-Ocean is by no means the only listing candidate that it attracting the attention of investors. Soho China, which focuses primarily on commercial developments in Beijing and is seeking to raise up to $1.65 billion, and smaller-scale Guangdong-based residential developer China Aoyuan Property Group, which is targeting $467 million at the top end, are both well oversubscribed.
Both companies are due to close and price their respective offerings later this week. Soho ChinaÆs IPO is arranged by Goldman Sachs, HSBC and UBS, while Aoyuan is brought to market by Credit Suisse and Morgan Stanley.
Looking outside the property sector, China Dongxiang, which owns the fashionable sportswear brand Kappa in China, and Bosideng International, which is ChinaÆs leading designer of down apparel, are both said to be covered only two days into their institutional roadshows. Dongxiang is looking to raise up to $702 million through Deutsche Bank and Merrill Lynch, while Bosideng is hoping for a slightly larger $836 million. Goldman Sachs and Morgan Stanley are the joint bookrunners for that deal.
Hidili, the coal producer that started trading on Friday, also attracted overwhelming demand with its retail tranche alone tying up approximately HK$275 billion ($35 billion) worth of cash. This made it slide in just ahead of Mainland conglomerate Fosun International as the sixth most popular Hong Kong IPO among retail investors. The UBS-led offering raised $525 million after the price was fixed at the top of the range at HK$6.83. It closed on Friday at HK$12.12.
ôWith the current bullish market, we will continue to see more IPOs being absolute blow-outs as investors want to take advantage of the IPO discount,ö one observer projects. ôIt is getting harder and harder to find good value stocks in the secondary market so the new listings offer a good alternative,ö he adds.
The Hang Seng Index added another 5% last week and finished at a new closing high of 25,843 points on Friday. It is now trading more than 10% above where it was before the August decline and has rallied 33% from the trough of that correction, which was reached on August 17.
The 50bp rate cut by the US Federal Reserve last week sparked hopes that the US will be able to ride out the subprime loan crisis without slipping into a recession û or at least that it wonÆt drag the rest of the world economy down with it û and led to another wave of money flowing into Asian equity markets. However, for Hong Kong it was perhaps even more important that the cityÆs main lenders responded by cutting their lending rates by 25 basis points as well.
At the same time, the expectations of a narrowing valuation gap between Hong Kong-listed H-shares and their A-share counterparts in Shanghai or Shenzhen continue to support the Chinese stocks here. These expectations are based on a belief that Chinese nationals will soon be able to invest in Hong Kong stocks, bringing significant amounts of fresh funds to the local market.
Sino-Ocean is due to start trading on September 29.
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