Yichang IPO aims to woo choosy investors

The Chinese drug maker hopes to convince investors who have been highly selective in healthcare assets this year.

Chinese drug manufacturer Yichang HEC Changjiang Pharmaceutical launched an initial public offering in Hong Kong on Monday at a time investors are highly selective in taking on healthcare-related assets.  

A termsheet seen by FinanceAsia shows the company is selling 90.1 million shares, or 20% of its enlarged share capital, at an indicative price range of HK$13.70-HK$18.50 per share at the base size. There is a standard 15% greenshoe option.

At this range, the company is valued at 13.6x-18.4x consensus analyst earnings estimates for next year on a pre-shoe basis, or 14.0x-19.0x on a post-shoe basis.

The deal was launched as China’s pharmaceuticals sector faces pressure following the disappearance – and reappearance – of Guo Guangchang, chairman of Chinese insurance, industrial and pharmaceuticals conglomerate Fosun Group.

Pharmaceutical stocks were mostly under selling pressure on Friday when reports of Guo’s disappearance surfaced in the market. State-owned drug manufacturer Sinopharm Group saw its shares tumble 7.5%, while CSPC Pharma shares were also down 2.5%.

Shares of Shanghai Fosun Pharma fell 12% when trading resumed on Monday following a suspension last Friday.

But while the incident cast doubt over the industry’s short-term outlook, investors are clearly confident in the long-term prospects of China’s healthcare and pharmaceuticals sector. These companies have no difficulty selling shares if they are able to come up with a compelling equity story.

Chinese psychiatric specialty care service provider Wenzhou Kangning Hospital’s successful listing in November showed investors are keen to snap up quality healthcare assets. In one of the most successful healthcare IPOs this year, Kangning’s shares soared 13.7% on their debut in November.

However, similar assets could prove a tough sell if they are unable to provide a solid growth story. That was well evidenced by Harmonicare Medical Holdings, which saw its shares plunge 29.2% within two days after its market debut despite pricing at a discount to its listed peers.

Selling point

As healthcare specialists are being highly selective, Yichang will have to come up with a strong selling point to impress them.

One selling point is the relatively high entry barrier to the company’s key product area of anti-influenza drugs, Yichang’s director of strategic development Dong Suisui said in a press conference.

The company’s leading anti-influenza drug Kewei has been increasingly important in terms of revenue contribution. Sales of the product accounted for 3.4% of the company’s revenue in 2012 but it has drastically increased to 70.7% in the first six months this year.

Dong expects there is unlikely to be any competition in the short- to medium-term for Kewei because of the high research and development costs involved in producing anti-influenza drugs, and also the lengthy process of securing regulatory approvals.

Going forward, Yichang plans to expand its product portfolio to cover other therapeutic areas to diversify its revenue sources. As such, it intends to deploy proceeds from the IPO to construct two new production plants as well as for marketing expenses and working capital.

The company has lined up four cornerstone investors committing a total of $80 million before bookbuild began. They include Saxi Electric ($30 million), Pinpoint Asset Management ($22 million), Ally Bridge ($18 million) and China Southern Dragon Dynamic Fund ($10 million).

Bookbuilding is expected to close on December 18 ahead of the December 29 target listing date.

CICC is the sole sponsor of the IPO and is one of the joint bookrunners alongside ICBC International, CMB International, ABC International, CCB International and Nomura.

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