Virscend seals IPO amid volatility

Investors take a leap of faith by buying into the Chinese private school operator despite a very volatile week at the start of 2016.

Virscend Education, the Chinese private education company, priced its Hong Kong initial public offering off the bottom end of the indicative price range on Friday despite choppy markets during the course of its bookbuild.

Final pricing was settled late on Friday at HK$2.40 per share against the indicative range of HK$ 2.18–HK$2.92 but allocations were still being finalized on Sunday evening, a source familiar with the situation told FinanceAsia. The company raised HK$1.8 billion ($232 million) from the sale of 750 million shares, representing 25% of its enlarged share capital.

The Sichuan-based private school operator built its book in an extremely volatile week when trading in the Chinese stock markets halted twice after plunging 7% on Monday and Thursday, triggering the newly implemented circuit-breaker mechanism that was put into force at the beginning of the week. China’s securities regulator suspended the system late Thursday citing the need to maintain market stability.

Despite recovering some of the losses on Wednesday and Friday, the Shanghai Composite Index still ended the week with a 10% decline, while Hong Kong’s Hang Seng Index fell 6.7% in the week.

However, Virscend Education was able to solicit solid demand since it has been soft marketing the deal to potential investors as early as October last year, the source familiar with the situation said. Some of them saw Virscend as a solid growth story and are willing to buy shares at a premium to other private school operators.

Indeed, at the final price Virscend was valued at 21.4 times forward 2016 earnings on a syndicate consensus basis, or a 36% premium to China Maple Leaf Education, the only Chinese private school operator listed in Hong Kong. That is despite China Maple Leaf reporting a four-fold increase in net profit for the financial year ended August 2015.

But while valuations serve as a reference to investment in education companies, a more important barometer is the management’s ability to execute the right strategy to lead the company to profitability, a Hong Kong-based fund manager told FinanceAsia. “For extremely high-growth sectors like education, it is more important that the company can deliver the growth that it promises to investors.”

In the first six months of last year, Virscend Education reported net profit of Rmb110.4 million ($16.7 million), which was already close to the full-year profit of Rmb114 million it achieved in 2014. According to its IPO price it was valued at 55 times earnings as of the end of June last year.

But the syndicate consensus valuation means it is expected to grow another 30% in net profit next year, assuming its profitability remained stable throughout 2015.

Xu Ming, chief executive, said the highly fragmented private education industry in southwest China provides huge room for growth. Virscend Education was the largest private fundamental education provider in the region despite having just 0.43% market share, according to the company’s prospectus.

The company is aiming to enhance profitability by optimizing pricing through tuition increases, according to chairman Wang Xiaoying. In 2015 total tuition fees grew 11% on a year-on-year basis to Rmb6.9 billion, according to the prospectus.

Virscend Education provides private education for students from kindergarten to university. It operates three foreign language schools, a kindergarten, a private school and a university in Sichuan province.

Macquarie is the sole sponsor of the IPO, while Haitong Securities, Guotai Junan International and Industrial Securities are joint bookrunners.

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