While representing entirely different industries, all the offers attracted hefty demand from both institutional and retail investors who were seemingly not concerned about the 2.9% drop in the Hang Seng Index on Tuesday last week - the worst one-day performance in more than five years. While partly reversed in subsequent days, the drop contributed to the Hong Kong market recording a weekly loss for the first time in nine weeks.
Observers attributed the demand to the large amounts of liquidity in the market, but did note that the rush to get deals done before the Christmas period increases the risk that there will be a bit too much paper to absorb in the secondary market, leading to somewhat disappointing trading debuts. Several of the ongoing deals will start trading only just before the holidays at a time when many investors will be securing their profits for the year, rather than adding further to their portfolios.
Kingboard Laminates closed the largest among the three deals, pricing its offering at HK$7.73 per share for a total deal size of HK$5.80 billion ($745 million). Goldman Sachs was the sole arranger of the offering, which was a spin-off from Hong Kong-listed Kingboard Chemicals. Eighty percent of the total offer was made up of existing shares sold by the parent while the remainder were new shares.
Goldman was also joint bookrunner together with China International Capital Corp for China Communications Services, which raised HK$2.84 billion ($365 million) after pricing its IPO at HK$2.20 per share. The company, which provides engineering and technical services to the MainlandÆs five major telecom operators, raised its initial HK$1.56-$1.96 price range to HK$1.70 to HK$2.20 a few days into the roadshow in response to good demand.
ôA lot of people think this is a great play on 3G and the need to upgrade ChinaÆs telecom systems and were keen to participate,ö one observer says of the strong interest. The reasoning is that CCS will be involved in whichever 3G technology China decides to adopt, meaning investors wonÆt be running the risk of betting on the wrong horse.
Even more in demand, however, was gold miner Zhaojin Mining Industry, which was brought to market by Cazenove and UBS. A pure play on gold prices, the company was supported by a resumption of the upward trend in the spot price as well as the good share price performance of two other Hong Kong-listed gold miners.
The gold price has bounced from its recent trough near $570 about two months ago and on Friday traded around $647 per ounce. Most analysts now expect the price to average between $675 and $700 per troy ounce in 2007, which is only slightly below the all-time high of $732 that was hit in May.
Zhaojin fixed the IPO price at the top of the HK$9.80 to HK$12.68 range for a total deal size of HK$2.19 billion ($281 million). At that price it will be valued at 21.6 times its 2007 earnings. This is higher than smaller play Lingbao Gold, which derives about 80% of its revenues from lower-margin smelting operations, but below Zijin Mining, which trades at a 2007 PE multiple of about 24 times.
Zijin has larger reserves and lower operating costs than Zhaojin, but a shrinking revenue contribution from gold suggests the valuation gap will narrow in the future. Lingbao trades at about 15 times next yearÆs earnings after gaining 148% since its trading debut in January.
Zhaojin, which is based in Shandong Province, offered 25% of its issued share capital and had set aside about $341 million worth of shares for four corporate investors, leaving only $210 million for other institutional investors. And when the 10% retail tranche attracted demand for 530 times the shares available and triggered an automatic increase of this tranche to 50%, the amount of shares for institutional investors shrunk further to about $96.5 million worth. According to a source, the institutional demand was about 225 times that final size.
ôChina stocks are hot and retail investors in particular are crazy about gold as a long-term investment. And when retail is in, institutional investors know there will be good support in the secondary market so they put in orders too,ö he says.
Such reasoning runs almost counter to the usual argument that institutional investors tend to dislike stocks that are ôhotö among retail investors as they know they will get a smaller allocation and will risk having to chase the stock in the secondary market if they want to add to their holdings.
Kingboard and CCS also faced a full clawback after their retail tranches were in excess of 150 times covered. This boosted the retail portions of both deals to 50%. In the case of CCS, the institutional portion was also reduced to accommodate a combined $60 million strategic investment û just over 16% of the deal - by Cisco Systems and International Data Group, leaving about 600 other institutional subscribers to share only $122.5 million worth of stock. According to a source, that portion of the deal ended up ôwell over 100 times coveredö.
The final price valued CCS at 14 times its 2007 earnings, which represented a discount to telecom equipment provider ZTE. The latter was viewed as a comparable even though CCS is more purely focused on services.
Kingboard did not sell any shares to strategic or corporate investors, but did set aside 5% for shareholders of its parent company. Post claw-back, the remaining $354 million institutional tranche was 35 times covered with more than 300 investors in the book.
Much of that demand was said to have come from Asia-focused and global funds with an understanding of the technology market. Partly because of Kingboard ChemicalÆs well-know name among Hong Kong investors, the order book was Asia dominated, with about 70% of the demand generated in this region. Europe accounted for about 20% and the US for the remaining 10%.
Existing shareholders of Kingboard Chemicals were also well represented as they sought to tap into the stronger growth potential of the subsidiary. A global leader in its industry with an organic growth rate of about 20%, Kingboard Laminates was priced at 12.6 times next yearÆs earnings, which compares with about 11.2 times for its parent company. Kingboard Chemicals saw its share price rally 8.4% during the final two days of the bookbuild to a close of HK$31.35 last Thursday, although over the two-week roadshow as a whole, it was up a more modest 1.8%.
Kingboard and CCS will both start trading on December 7, with Zhaojin following a day later. CCS and Zhaojin have the typical 15% greenshoe that may boost the total proceeds by that same amount, while KingboardÆs greenshoe has been limited to 10% of the base offer.
These three deals will be followed by a flood of other listing hopefuls over the next couple of weeks. China Communications Construction, which builds harbours and other infrastructure projects, and China Coal Energy will be hoping to raise a combined $3.77 billion when they fix the price for their respective offerings this week. Both deals are already well covered and barring a big set-back in the local market, they should price at the top end as well, sources project.
Next in line will be the two real estate investment trusts sponsored by Henderson Land Development and Regal International Hotels, which are targeting a bit under $400 million and $600 million-$700 million respectively. Also kicking off a roadshow this week is Xingda Steel Cord, which will be aiming to raise between $125 million and $150 million through sole bookrunner Goldman Sachs.
Away from Hong Kong, but still expected to attract a lot of local interest, Melco PBL Entertainment (Macau) has filed with the SEC for a Nasdaq IPO. The 50-50 joint venture between Hong Kong-listed Melco International Development and Australia-based Publishing and Broadcasting Limited is aiming to raise about $900 million by selling 53 million American Depositary Receipts at a price between $16 and $18 apiece. Including the 15% greenshoe, the offer could end up raising as much as $1.1 billion if priced at the top end of the range.
Melco PBL is seeking funds to pay for several casino developments in Macau, including the City of Dreams project that will see its first phase ready to open in late 2008. The company will be brought to market by Credit Suisse, Citigroup and UBS.