SITC prices largest HK IPO since Agricultural Bank

China-based SITC International Holdings has raised HK$3.12 billion ($400 million) from the largest initial public offering in Hong Kong since Agricultural Bank of China’s record-breaking dual-listing in July. But the deal is by no means coming in isolation. Since the beginning of September, seven smaller IPOs have already priced in Hong Kong and currently in the market are another nine offerings ranging from $200 million to $680 million. Add to that AIA Group’s second attempt at a Hong Kong listing, which is expected to raise about $15 billion and is kicking off pre-marketing today following the aborted trade sale earlier this year, and a long list of ongoing and upcoming deals in the rest of Asia.

The fact that the SITC deal got done with so many offerings to choose from is further evidence of the strong investor demand for Chinese and Asian equities at the moment as economic growth in the region is expected to outpace that in Europe and the US for the next few years at least. Being involved in intra-Asia container shipping and land-based logistics services, SITC is a key beneficiary of this growth outlook and the talk of an Asian de-coupling that has recently resurfaced.

At the same time, though, the deal clearly shows that investors are getting more selective in terms of which deals to focus on. According to a source, the institutional investors who did the work on SITC generally liked the story and many came into the deal in large sizes, some as anchor investors. The allocation was skewed towards these anchors although the institutional tranche, which accounted for 90% of the offering, was supposedly several times covered when the deal closed on Friday. However, other investors chose to pass altogether as they were too busy looking at other offerings.

Retail investors were also seemingly unimpressed, as the 10% retail tranche was only 1.7 times covered. One reason for this could be the absence of cornerstone investors, as high-profile investors pledging their support as cornerstones are often taken as a cue that a deal is worth investing in. But with the short- to medium-term market outlook still viewed as uncertain, most investors aren’t too keen to commit to the lockup that comes as part of the cornerstone agreement.

Other reasons for the muted retail interest could be that SITC’s story takes a bit more work to understand – shipping isn’t a favourite with everyone for starters, and the logistics element does also make for a more complex business plan -- and that the Hong Kong public prefer consumption-focused IPOs, of which there have been several to choose from lately. Among the deals pricing last week were Boshiwa International Holdings, a retailer of clothing and other products for children, and Bensunyen Holdings, a producer of therapeutic and diet teas. Both deals were priced at the top of the range, allowing them to raise $319 million and $168 million respectively.

By comparison, SITC fixed its IPO price at the bottom of the HK$3.12 to HK$4.08 price range, which resulted in a price-to-earnings multiple of 11.1, based on projected earnings for 2011. This positioned the listing candidate at a discount to key peers like Chinese container shippers China Cosco and China Shipping Container Lines (CSCL), which trade at approximately 14 and 15 times next year’s earnings, respectively, and global logistics companies Federal Express and UPS, which are quoted at 15 to 16 times. The significant discount is another sign of the current times, with bankers saying that a sensible – even generous -- valuation is important for getting investors to look at a deal in the first place. Bankers are also keen to keep the price at a level where the shares have a good chance of trading up in the aftermarket, so as to smooth the way for the deals coming next.

SITC may not have had that much option in terms of pricing, as many of the 80 something orders in the institutional book came with price limits. However, a source said it could have chosen to price slightly above the bottom.

The company, which has been in operation since 1992, is the largest non-state-owned shipping logistics company in China and the third largest container shipping operator in terms of capacity after China Cosco and CSCL. Its exclusive focus on the intra-Asia part of the container shipping market – including the rapidly growing trade between China and the Asean region – has helped it outperform its peers both in terms of volume growth and profit margins over the past few years, which have been marked by the financial crisis.

With regard to the margins, a syndicate research report cited higher route-density, short fleet idle time, higher load factors, and lower operating costs – the latter due to an asset-light operating model with the bulk of its 42-vessel-fleet being leased rather than owned. The 15 ships that it does own have mostly been bought during down cycles when prices have been low, and indeed, 45% of the IPO proceeds will go towards the acquisition of 15-25 more ships, either new or second-hand, as prices are currently at attractive levels. Meanwhile, volumes have been underpinned by the company’s early entry into Vietnam and the Philippines – two markets that have seen higher growth of Chinese exports than the rest of Asean.

Container shipping accounted for just over 60% of SITC’s revenues and about 55% of the net profits in 2009, while the remainder came from the land-based logistics business, which includes freight forwarding, shipping agency, depot and warehousing, trucking and ship brokerage services.

The company sold 650 million new shares, or 25% of the share capital, with the help of Citi and China International Capital Corp. The deal features a 15% greenshoe, made up of secondary shares sold by the management and other employees, which could boost the total deal size to $460 million if fully exercised. The shares are due to start trading on October 6.

Boshiwa’s IPO was arranged by Bocom International, Credit Suisse, Deutsche Bank and UBS. Besunyen’s offering was handled by Credit Suisse and Morgan Stanley.