Union Medical implants China growth into IPO story

The HK-based plastic surgery and beauty treatments provider is pressing ahead with its IPO, hoping steadier markets and its untapped China growth story will see it over the line.
A Union Medical advertisement featuring Gillian Chung, a Hong Kong celebrity and a company spokesperson
A Union Medical advertisement featuring Gillian Chung, a Hong Kong celebrity and a company spokesperson

Hong Kong-based aesthetic medical service provider Union Medical Healthcare is pressing ahead with its initial public offering, encouraged by the less volatile market conditions since premarketing of the deal began two weeks ago.

The Hang Seng Index ended Monday at 19,111 points, largely unchanged from its mid-February level, indicating that investor confidence has yet to overcome its nagging Chinese growth worries but also opening a narrow window for potential IPOs.

At least that is what the management team at Union Medical believes, having launched the transaction on Monday and set a target listing date on March 11. 

Credit Suisse is sole sponsor of the IPO as well as joint bookrunner, together with CIMB and Haitong International.

One source familiar with the situation said the timetable was shortened after Union Medical was advised to cut roadshows outside of Asia and to focus mainly on investors within the region. And that appears to be a sensible piece of advice since non-Asian investors are unlikely to indicate significant interest to the IPO while the majority of Union Medical's business is in Hong Kong.

Union Medical, which offers plastic surgery as well as traditional beauty services under the Dr Reborn brand, is a market leader in Hong Kong with a loyal customer base. So its products and services benefit from fairly inelastic demand, meaning  the company is less likely to be affected by potential price wars, a second source familiar with the situation told FinanceAsia.

Still, the same source added that while the Hong Kong business can potentially continue to grow due to a growing public receptiveness to plastic surgery, Union Medical’s China expansion would likely be the long-term revenue growth driver due to rising demand for beauty services among China's massive middle-class.

Tang Chi-fai, founder and chairman of Union Medical, said the company intends to apply for operating licences in Shenzhen to expand its footprint in mainland China. At the moment Union Medical operates 20 clinics in Hong Kong, two in Macau and one in Guangzhou.

Discounted valuation

The indicative deal terms include the sale of 245 million new shares, or 25% of the company’s enlarged share capital, at a price range of HK$2.88 to HK$3.88 per share plus a standard 15% greenshoe option. That will raise $91 million to $123 million on a pre-shoe basis and $105 million to $141 million post-shoe.

Shanghai Haohai Biological Technology, which is listed as one of Union Medical’s main comparable companies for valuation purposes, is intriguingly its only cornerstone investor with a $10 million commitment, according to a term sheet seen by FinanceAsia

Shanghai Haohai's share price ended at HK$45 on Monday, giving the biomedical materials producer a market capitalisation of $926 million and a forecast earnings multiple for the current financial year of 22 times.

By comparison Union Medical shares are being marketed at 11.5 times to 15.5 times earnings for the current financial year, based on consensus syndicate forecasts. That represents a 35% discount to the estimated fair value range suggested by syndicate analysts.

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