Budget hotel operator China Lodging Group rallied as much as 26.5% in its Nasdaq trading debut on Friday before settling 13.6% higher at $13.92. Demand was robust during the bookbuild for the initial public offering, but the strong debut suggests that it was probably the right call not to price above the initial range. According to a source, there were discussions about whether to do this so that the company might raise a bit of extra cash, but in the end, the price was kept at the top of the original range, resulting in a deal size of $110.25 million.
Given the poor performance by several other IPOs in the US recently, including a few deals that have been pulled, the initial success could quite easily have been turned into failure by being too greedy and, in the long-run, the company is likely better off for having been a bit generous towards its new shareholders from the start.
The company, which is the third largest budget hotel operator in China and better known under the name of Hanting Inns and Hotels, offered 9 million American depositary receipts, each corresponding to four new ordinary shares, in a range between $10.25 and $12.25. At the final price of $12.25, the company is valued at a 2010 enterprise value-to-Ebitda ratio of 11.7-11.9 times, based on the bookrunner forecasts. This translated into a sizeable discount versus market leader Home Inns and Hotel Management, which has been listed on Nasdaq since October 2006 and trades at an EV/Ebitda multiple of about 14, but a slight premium versus 7 Days Inn, which is trading at about 11.5 times. 7 Days Inn is closer to Hanting in size and has been listed on the New York Stock Exchange since November last year.
According to a separate source, the deal was more than 12 times covered. Goldman Sachs and Morgan Stanley were joint bookrunners.
If the market performance continues, Hanting should be able to exercise the 15% greenshoe, which could raise the total proceeds from the IPO to $126.8 million. However, the company has already made a bit of extra cash since it also sold 7.2 million new shares to Ctrip at the IPO price in connection with the listing, although the transaction wasn't part of the IPO itself. Ctrip also bought additional shares from a group of existing Hanting shareholders, bringing its total shareholding to 8%. Pre-shoe the IPO accounted for 15.3% of the share capital. Ctrip is the one of the largest online travel providers in China and was co-founded by Qi Ji who is also the founder and executive chairman of Hanting.