Notwithstanding a roughly 10% dip in the China Enterprises Index over the past two weeks, a HK$2.12 billion ($272 million) IPO for Weiqiao Textile appears to have been a huge hit with investors. Books for the 249.77 million share deal were already two times covered by the first day of bookbuilding and went on to close more than 25 times covered on the institutional side and just under 120 times covered on the retail side.
With BNP Paribas Peregrine as bookrunner, the H-share deal was priced early on Friday morning at HK$8.50 per share, at the very top end of its HK$6.15 to HK$8.55 range. There is also a 37.466 million share greenshoe, which will bring the public float up to 35.1% from 32%.
At this level, the transaction has been priced on a P/E ratio of 13.6 times 2003 earnings on a fully diluted basis. This represents a small discount of about 2.5% to locally listed textile manufacturers such as Texwinca, currently trading at about 14 times 2003 earnings.
Huge demand for the transaction meant there was little paper for the syndicate and clawbacks meant the retail allocation was increased from 10% to 50% of the total. In fact, only co-lead Nomura is said to have received a small allocation to appease large demand from Japan, where the company organised a roadshow lunch.
Other co-leads on the placement tranche comprised BOCI, CICC, CLSA and Shenyin Wanguo, with DBS Vickers, ING and Kim Eng as co-managers. For the Hong Kong public offering, BOCI, CLSA, China Southern, Kim Eng and Shenying Wanguo were co-leads, with CM-CCS, Guotai Junan, Sinopac and Tai Fook as co-manager.
Observers attribute four main reasons for the deals success. Firstly, there is pent-up demand for China-related stocks, which have been pretty thin on the ground during 2003. Weiqiao is the third largest China-related offering of the year after Sinotrans and Hopewell Highway Infrastructure.
Secondly, BNPPP has developed a reputation for bringing deals that do not try and push valuations too far. Investors have, for example, done very well from its last IPO for Linhua Supermarket in June. This deal has now almost doubled from its IPO price of HK$3.875 to the HK$7.90 mark.
Bankers away from the lead describe Weiqiao's valuation as reasonable. The company is a very much a pure play on the China growth story, with upside deriving from the potential for consolidation within the fragmented domestic cotton industry and the removal of WTO-related export quotas.
The labour intensive nature of the cotton textile industry means production is shifting from developed to developing nations and China is now the world's largest, with a 24.8% market share. According to Weiqiao chairman Zhang Bo, the company has a 3% market share, but is hoping to raise it five-fold to 15% by 2007.
Weiaiao is currently ranked number 1 by turnover in the cotton industry in the PRC, recording revenues of Rmb4.38 billion ($530 million) during 2002. Based in northeastern Shandong province, the company is majority-owned by the Zouping collective and exported 13.2% of its products during 2002.
The quality of the order book for the deal is said to have been particularly high, with just under 200 accounts allocated paper. By geography, about 50% of the deal went to Asia and 25% each to Europe and the US.
Trading of the stock will commence on Wednesday and the level of oversubscription is likely to provide a strong buffer in a market where sentiment towards China stocks has weakened over the past week or so. Bankers say this stems from PBOC moves to raise minimum reserve requirements, which will sap liquidity from the market.
The H-share market is, nevertheless, still up 49.4% on the year.