The final price of HK$3 per share gives a total deal size of HK$8.15 billion ($1.04 billion), which makes it the second largest Hong Kong IPO this year after China Railway Construction CorporationÆs (CRCC) $2.3 billion H-share offering. However, thatÆs not saying a whole lot as there has only been two other successful listings so far this year û the $409 million IPO for onshore drill rig manufacturer Honghua Group and a tiny $13 million IPO for New Media Group, a Hong Kong-based publisher of Chinese-language magazines.
Honghua saw reasonably solid demand during the IPO process but has been under a lot of pressure since it started trading on March 7, which has contributed to the unwillingness by investors û especially retail investors û to commit money for yet another market newcomer. The stock fell 8.4% on the first day and finished its first week 25% below the IPO price.
ôAt the moment the chance that an IPO will trade down is greater than it will go up, just because the markets are driven almost entirely by sentiment,ö one source says. They also tend to put more emphasis on bad news, which makes IPO investments risky unless you are in it for the longer term and are willing to accept some weakness in the short term.
ôCompanies that come to market at the moment either have to be absolute gems or incredibly cheap in order to make it and unless the issuers really need the money they will be better off waiting,ö the source continues.
CRCC fared a lot better when it started trading last Thursday, gaining 12.1% on the first day. And while it fell on the second day, it is still 4.7% up from its listing price, which isnÆt a bad feat if you consider that the Hang Seng Index fell 5% during those two days. However, it still failed to live up to expectations, which had remained high thanks to record high retail subscriptions (worth $68 billion) and orders from more than 800 institutions.
Want Want was a different story altogether. According to sources, the 90% institutional tranche was about 1.5 times covered at the bottom of the range with a significant portion of that demand coming from private wealth clients. There was also good support from long-only accounts in the US on the final day of bookbuilding, which added to some balance to an order book that was otherwise dominated by Asian money. In total only about 70 investors participated.
The retail tranche was just over one time covered, avoiding the fate of being undersubscribed, as had been rumoured during the week. However, the demand was well below the 15 times that would have resulted in a partial clawback.
Still, the company û and joint bookrunners BNP Paribas, Goldman Sachs and UBS û would have been happy to get the deal done in the current market, which saw a couple of the key comparables fall by a sizeable amount during the marketing. The deal got done because Want Want is a large company with a well-known brand that sports much better margins than instant noodle makers Tingyi and Uni-President China, which are viewed as its closest comparables. It is also in the ôrightö sector as most analysts expect Chinese consumption plays to continue to perform well even if there is a global recession.
According to one source, some long-term investors are happy to buy new companies in a depressed market in the hope that they will be able to gain significantly when the market turns around. ôSome investors have realised that it is better to buy IPOs in a bad market since they get a greater allocation,ö he says.
Want Want, which is the market leader in China within rice crackers, flavoured milk and soft candy, sold 20.5% of its share capital, or 2.72 billion shares and will have a market capitalisation of $5.1 billion at the time of listing û slightly below TingyiÆs $7.8 billion. The shares were offered in a range between HK$3 and HK$4.10 apiece.
Of the total number of shares on offer, 85% were secondary shares that will be sold by chairman and CEO Tsai Eng-Meng who controls the company together with other family entities after the buyout six months ago when the company was delisted from the Singapore stock exchange.
There is a 15% greenshoe of all secondary shares, which could lift the total proceeds to $1.2 billion.
Nine cornerstone investors bought a combined $192 million worth of shares, or 18.5% of the final deal size. Uni-President China and a second subsidiary of the Taiwan-based Uni-President group, President International Development, bought a combined $50 million; Cheung Kong (Holdings) took $25 million; and boutique investment management firm Arisaig Partners, Bank of China, China Construction Bank, Abu Dhabi-based Chimera Financial Investments and Chinese Estates Chairman Joseph Lau took $20 million worth of shares. Rabobank invested $17 million.
The final price values Want Want at about 20.1 times this yearÆs projected earnings, which compares with 28 times for Tingyi. The latter held up quite well during Want WantÆs bookbuilding after falling from a valuation of 32 times to 29 times in the four days leading up to the start of it. More damaging was the 20% drop in China Mengniu DairyÆs share price during the two-week roadshow, which took its 2008 P/E multiple from 24 times to just below 20 times. Investors viewed the milk and yoghurt producer as a comparable for Want WantÆs flavoured milk business and worried that a lack of confidence in Mengniu might spill over into the listing candidate as well.
Based on syndicate estimates at the time of its IPO, Uni-President China, which is significantly smaller than the other two with a market cap of only $1.9 billion, trades at 22.3 times this yearÆs earnings.
Syndicate research suggests Want Want will grow at a compound annual growth rate of more than 30% both on the top and bottom line over the next couple of years. In 2007 it posted a profit of $194 million on revenues of $1.01 billion and had an Ebit margin of 20%. Syndicate analysts expect it to maintain a margin of 19% for the coming two years.
Want Want is due to start trading just after Easter (March 25), but before that another big test for the market will be Evergrande Real Estate GroupÆs IPO, which is due to close tomorrow. The developer is seeking to raise between $1.3 billion and $2.1 billion with the help of Credit Suisse, Goldman Sachs and Merrill Lynch and is said to be struggling to capture the attention of investors who are not that favourable towards Chinese property stocks right now after a huge collapse in valuations over the past three months.
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