Xinhua Finance Media falls after pricing IPO at mid-range

The market correction and a reduced appetite for risk weigh on Mainland listings in the US, although Xinhua's $300 million offering is well covered.
Xinhua Finance Media last week priced its initial public offering on Nasdaq at the mid-point of the $12 to $14 indicative range for a total deal size of $300 million.

This meant it may have missed the opportunity to become the second largest Chinese listing in the US after Suntech PowerÆs $400 million IPO in December 2005. At the current size, it will fall behind Mindray MedicalÆs $311 million offering in September last year û unless the majority of the 15% greenshoe is exercised.

According to sources, demand was strong enough to have allowed the price to be fixed at the top but given the widespread correction in equity markets during the two-week roadshow, negotiations between the management and the bookrunners finally settled for leaving a dollar on the table.

ôThere was some apprehension about being too bold and aggressive on pricing,ö one source says, noting the 5.2% drop in the Nasdaq Composite Index in the past two weeks.

In hindsight though, perhaps they should have been even more generous as the share price dropped 12.7% on the first day of trading Friday on a day when Nasdaq was virtually flat. Sources close to the offering argued that there had been no signs that investors werenÆt happy with the final price, however. Instead, they said, the fall had likely to do with a reduction in risk appetite in recent weeks, which has taken a toll on Chinese stocks listed in the US in particular.

Among the worst losers were budget hotel operator Home Inns and recently listed bio-pharmaceutical company 3Sbio which dropped 19% and 32% respectively during the two-week roadshow û Friday included.

In addition, the final price of HK$13 valued the diversified media unit of Chinese financial news and data provider Xinhua Finance at 32.9 times projected 2007 earnings, which marked a slight premium to Nasdaq-listed Focus Media. And given that the latter is something of an investor darling, this may have been a bit too aggressive.

Focus Media, which sells advertising space on a network of flat-screen panels in commercial buildings and shops, was quoted at a 2007 price-to-earnings multiple of about 30 times at the time of pricing after falling 7.8% during Xinhua FinanceÆs roadshow. At the start of the marketing period, Focus Media traded at a P/E multiple of 33 times.

ôHad the markets not crapped-out, the deal would have priced at parity and investors were okay with the slight premium since the story and the outlook were still the same,ö says one observer. And with reference to the interest: ôThere is a limited opportunity to invest in the Chinese media sector, especially broadcasting.ö

Notwithstanding the first dayÆs decline, which saw the share price sink as low as $10.70 at one point in the afternoon, investors will be hoping that Xinhua Finance will be able to replicate the success of Focus Media, which has seen a 352% rise in its share price since its IPO in July 2005 driven by a steady increase in profits.

Xinhua FinanceÆs business plan is entirely different to that of its more established Mainland rival as it focuses on the production and distribution of broadcasting content primarily for TV and radio, including business and financial news, wealth management and lifestyle programming, with the aim of attracting the highest income audience in China. But the ultimate aim of both companies is to attract as much advertising as possible.

According to independent research firm ZenithOptimedia, ChinaÆs media advertising market is projected to grow to Rmb133.2 billion ($4.3 billion) in 2008 from Rmb80.1 billion in 2005, or at a compound annual growth rate of 18.5%.

The growth will be driven by ChinaÆs strong economic performance, the increased affluence of the middle class, the growing urbanisation and more specifically by an anticipated pickup in advertising demand in the run up to the Beijing Olympics in 2008 and the Shanghai World Expo in 2010.

The offering, which was arranged by joint bookrunners JPMorgan and UBS, was eight times covered and attracted more than 200 investors, according to sources. Not surprisingly, given that most of the roadshow was spent in the US, the majority of the demand came from US-based accounts.

However, one person familiar with the bookbuilding said Asian investors were very important to the deal with several long-only players coming in to anchor the deal early on, which helped provide support amid the volatile markets.

Xinhua Finance sold a total of 23.08 million American Depositary Shares û each accounting for two common shares û or 33.7% of the company. If the 15% overallotment option is exercised in full, the free-float will increase to 37% and the company could end up raising $345 million.

Not all of that will go to the company though, as 25% of the base offer was backed by secondary shares sold by existing shareholders. Among those were Fredy Bush, the chairman and CEO, a group of directors and executives, and Patriarch Partners Media Holdings. The selling shareholders provided shares to cover 6.7% of the overallotment.

The parent companyÆs stake will fall to 36.6% from 49% following the IPO. The group of directors and executives will be the second largest shareholder with 17% while Patriarch will hold 8%. Fredy Bush will have a direct 5.8% stake.

Five percent of the ADS offering was set aside for directors, officers, employees, and associates of the company.

Xinhua Finance has really only been put together over the past 12 months, which could bring a lot of operational risk, but also significant growth opportunities as the company beefs up its content production in order to attract more advertising.

According to a source, net profit is expected to more than double in 2006 and show significant growth rates of up to 60% in 2007 and 2008, after which it should be able to achieve a long-term net profit growth of around 30%. In 2006 it generated a net profit of $3.34 million on revenues of $59.0 million.

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