SJM's IPO gamble pays off

In a tough market, casino operator SJM prices Hong KongÆs third largest IPO this year, while sportswear company XDLong is forced to cancel its listing plans.
Despite adverse market conditions that have caused three IPOs to be cancelled in the past two days, MacauÆs largest casino operator, Sociedade de Jogos de Macau (SJM), managed to beat the odds and price the third largest Hong Kong IPO this year. The company, which is controlled by Macau's gaming tycoon Stanley Ho, raised HK$3.85 billion ($494 million) ahead of its July 10 trading debut after pricing the deal at the bottom of the HK$3.08 to HK$4.08 range.

ôThere was very strong institutional demand from Asia and London. The corporate, and the friends and family, presence was also very strong,ö says a source close to the deal. The source goes on to say that the institutional book was made up of predominantly long-only global investors. The retail tranche was also fully subscribed, but not enough to trigger a clawback.

Even in a market where investors are eschewing IPOs to buy in the secondary market, the valuation of SJM apparently made it attractive enough to invest in before the listing. The final price of HK$3.08 a share translates into a 2008 price-to-earnings ratio of 10.1 times, which puts it at a significant discount to its competitors, even though some firms in the gambling industry have been hit hard in the past week.

As of July 2, US-listed Las Vegas Sands was down 22% from its closing price on June 23 û the day before SJM started its roadshow û and its P/E ratio had dropped from 82 times to 63.5 times. But SJM still comes at an 84% discount. The valuation gap versus more modestly priced gaming companies is also sizeable at 45% versus MGM and 62% versus Wynn Resorts, which trade at 18 and 27 times respectively.

The IPO market might be bad, but it has been a bumper month for gaming in Macau. Even though mainlanders face new restrictions in travel to the gaming hub, the regionÆs casinos saw their third best month since records began û bringing in revenues of Pt9.78 billion ($1.2 billion).

SJMÆs listing has been a long time in the making with previous IPO plans dating back to at least 2006. More recently, an attempt to come to market in January was cancelled due to questions raised by the regulators. One of the key reasons for the delay û and indeed for the additional questions raised by the stock exchange earlier this year û is the legal actions instigated by Stanley Ho's sister Winnie Ho. Even after the deal was launched, there was continued speculation that it would be derailed by further legal problems.

In the time that it has taken for the IPO to get back on the road, SJM has had to halve its capital expectations due to the deteriorating equity market.

SJM has the largest market share in MacauÆs gaming sector, running 19 of the regionÆs 29 casinos. It is descended from STDM, the former monopoly that is controlled by Stanley Ho and which dominated gambling in Macau up until 2002. Since the introduction of competition, SJM has seen its market share drop significantly, and it is responding by opening up new gambling venues. Buying land and building new casinos form the bulk of the companyÆs capital expenditure plans.

The company sold 1.25 billion primary shares, which represents 25% of the enlarged share capital. A 15% greenshoe, if exercised, could increase the total size of the deal to $568 million. Deutsche Bank was the dealÆs sole bookrunner.

In contrast to SJM, mainland sportswear firm XDLong International fell at the final hurdle, as the company pulled its IPO of up to $127 million yesterday, the day that it was scheduled to price. The company, which was being brought to market by Deutsche Bank and Goldman Sachs, said in an announcement that it had not gone ahead with the listing due to ônew circumstancesö that had come to its attention.

Those circumstances were the continued downturn in the market. ôThere were some select accounts that came back with a positive reaction, but the biggest complaint that they had was with the timing,ö says a source close to the deal. Since XDLong started its roadshow on June 23, the Hang Seng Index has dropped 4.5% and the sportswear sector has taken a particular battering. On Wednesday, the day XDLong closed its books, two other mainland sportswear brands saw sharp drops: Anta Sports Goods dipped by 6.7% and Li Ning by 7.8%.

The source says investors had been particularly concerned with the performance of Xtep InternationalÆs IPO. ôXtepÆs pricing was too aggressive," he says, noting that the IPO, which was led by JPMorgan and UBS and priced at a 2008 P/E multiple of 17, took place during a market rebound at the end of May but its trading debut on June 3 came in a market that had started to turn sour again. The share price failed to stabilise during XDLongÆs roadshow and Xtep has now fallen 32% from its IPO price of HK$4.05.

Outside Hong Kong, Korean IT services provider SK C&C and dry-bulk ship owner Maritime Capital Shipping have also cancelled their IPOs over the past 48 hours due to the difficult market conditions. SK C&C was seeking to sell about $1 billion worth of all secondary shares, while Hong Kong-based Capital Maritime was aiming to raise up to $300 million through a Singapore listing.
¬ Haymarket Media Limited. All rights reserved.
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