Wah Kwong's listing hopes sink as deal is cancelled

The shipping company blames market conditions, but strong demand for another IPO candidate suggests sector concerns and company specific issues may have played a bigger role in keeping investors away.
Small-scale shipping firm Wah Kwong Marine Transport Holdings has cancelled its initial public offering amid a lack of investor interest, becoming the eighth company to call off a Hong Kong listing attempt mid-way this year and the first in a month. Wah Kwong was aiming to raise between HK$972.5 million and HK$1.28 billion ($125 million to $164 million) and had pre-arranged commitments from two cornerstone investors for about 14.4% of the deal, based on the minimum price.

This outcome was in stark contrast to that of Little Sheep which, according to sources, attracted about $2.4 billion of demand for its $100 million IPO that was priced last night, and confirms that buyers remain extremely choosy about where they put their money. It also shows that even though the number of IPOs in the market has picked up in recent weeks, there is no guarantee that they will actually price.

And while there have been six successful Hong Kong IPOs since womenÆs fashion retailer E-Land Fashion (china) pulled its offering in early May, Wah KwongÆs failed listing could mean that other IPO candidates may have to offer even larger discounts to their peers to get their deals off the ground. In any case, it is likely to have ensured that this will remain a buyersÆ market for some time yet.

Little information was available about the actual coverage levels for Wah Kwong, but the fact that the company and its two bookrunners had been unable to come up with a price even though the books had been closed since midnight on Tuesday (Hong Kong time) suggests the institutional order amount was slim at best. The retail tranche was under-subscribed, according to a source.

The company itself provided little insight into the real reasons for the withdrawal in a brief statement to the Hong Kong stock exchange, referring only to the overall market situation: ôHaving considered the current market conditions and the recent instability in the international capital markets, the company and joint lead managers have decided not to proceed with the global offering in accordance with the original timetable.ö

It added that it will review its position and make a further announcement should it decide to re-launch the offer.

Concerns about a turnaround in freight rates and an expected oversupply of dry-bulk ships over the next few years likely weighed on the demand, but some investors say they were also worried about the fact that a large part of Wah KwongÆs revenues in recent years have come from the sale of ships rather than from leasing operations û something which would be hard to replicate if the shipping market was to weaken.

Continued volatility in the Hong Kong stock market and a poor debut for sportswear manufacturer and retailer Xtep on the final day of Wah KwongÆs bookbuilding likely also played a role. Some observers also note that the deal may have been too small for many investors to take a serious look at it, as a volatile market makes them want to be sure their investments are liquid enough that they can exit reasonably quickly. However, this did not prevent them from investing in Little Sheep, which was an even smaller deal.

Wah Kwong has a fleet of 11 ships û seven dry-bulk ships and four tankers û which it contracts out on a time charter basis. It also has another 11 dry-bulk vessels on order that will start to come on stream early next year and will increase its combined dead-weight tonnage by 52% from the current 1.8 million dwt. Syndicate analysts had argued that the companyÆs aggressive fleet expansion will help underpin strong growth in the coming three years, and that it will remain a beneficiary of the strong demand for commodities in China and other emerging markets. However, so is Pacific Basin and investors may simply have chosen to stick with the animal they know at a time when the sector outlook is uncertain.

Wah Kwong, majority-owned by the Chao family which has been in the shipping business for more than 50 years, offered 25% of the company in the form of 125 million new shares with 10% set aside for Hong Kong retail investors. The HK$7.78 to HK$10.20 price range valued the company at 5.3 to 6.95 times its projected earnings in the fiscal year to March 2009, which implied a sizeable discount compared with the likes of China Shipping Development and Taiwan-based U-Ming Marine and Sincere Navigation. At the bottom of the range it was largely on par with Pacific Basin, however.

Wah KwongÆs offering was arranged by Anglo-Chinese and Cazenove. Little Sheep is being brought to market by Deutsche Bank and Merrill Lynch.
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