Sun Art Retail prices IPO at top to raise $1.06 billion

Sun Art Retail Group on Friday became the first issuer of size to price its Hong Kong initial public offering at the top of the range since MGM China at the end of May, following strong demand from both institutional and retail investors. The final price of HK$7.20 per share resulted in a total deal size of HK$8.24 billion ($1.06 billion).

The positive investor response came amid an improvement in the secondary market, which saw the Hang Seng Index gain in four of the past six sessions and more of the recent IPOs edge above their issue price. However, bankers also stressed that Sun Art was a bit of a unique company with its leading market share in China’s megastore sector, and argued that investors looking to play the China domestic consumption theme would have bought the stock even without the market recovery.

Bumi Armada
The same thing was said to be the case with Bumi Armada, Malaysia’s largest provider of ships and floating platforms for the oil and gas industry, which received massive institutional support for its IPO that was in the market at roughly the same time as Sun Art. The company, which is backed by Malaysian billionaire Ananda Krishnan, is a leading player in an industry that is currently hot as the high oil price is making energy companies put more resources into exploration and production. It has recorded a 50% compound annual growth in revenues in the past three years and enjoys strong margins.

Bumi Armada priced the deal above the mid-point at $3.03 for a total deal size of M$2.66 billion ($888 million). According to sources it could easily have priced at the top as there was no price sensitivity in the order book, but chose not to do so as a gesture to investors who came in. The shares were offered in a range between M$2.80 and M$3.15.

Also, the final price translated into a 2011 price-to-earnings ratio of 20 times, which was seen as a good even point to start trading at, rather than to chase the last few valuation points — especially since the company will likely need to come back to the market to raise more capital in the years ahead.

The deal is the largest IPO in Malaysia since Petronas Chemicals raised $4.15 billion in November last year and the second largest listing in Southeast Asia this year after the Singapore IPO of Hutchison Port Holdings Trust, which raised $5.45 billion.

Bumi Armada offered approximately 878.54 million shares, with 9.1% set aside to retail investors and 90.9% offered to institutional investors. However, approximately 42.2% of the institutional tranche was earmarked for ethnic Malay investors, also called Bumiputera investors, and another 25% was locked up by two-thirds of the cornerstone tranche, which meant only 261.9 million shares, or about $265 million of the deal, was be available for other institutional investors, including international accounts.

This latter portion was said to have been close to 50 times covered with the demand split fairly equally between domestic and international investors. According to a source, the allocation was skewed towards institutional investors, which included both long-only accounts and hedge funds.

The cornerstones, which bought a total of 300 million shares, or about $304 million of the deal, included Singapore’s Great Eastern and UK-based Prudential, both life insurance companies with a large presence in the region, as well as Malaysia’s Hong Leong Group, HwangDBS and state-owned investment company Permodalan Nasional.

Sun Art Retail
Sun Art, which operates 197 megastore complexes under the dual brands of RT-Mart and Auchan in China, had also secured a strong line-up of nine cornerstone investors, which bought a combined $420 million worth of shares, or 39.6% of the deal. Among them were General Atlantic and Hillhouse, which each invested $70 million, and Government of Singapore Investment Corp, Khazanah, Tiger Global Management and a unit of Bain Capital, which each bought $40 million worth of shares.

The remaining portion of the 90% institutional tranche was “hugely oversubscribed”, according to sources, and attracted more than 500 investors. The sources described the order book as a “who’s who” of the global long-only investment community and said the one-on-one conversion ratio from the roadshow meetings was above 90%.

The demand was said to have been evenly split between long-only and hedge funds, but the allocation was heavily weighted towards long-only accounts. About one-third of the investors got no allocation at all.

Meanwhile, the 10% retail tranche was 42 times covered, which triggered a clawback that increased the size of the retail tranche to 20%. It was the first clawback on a Hong Kong IPO since MGM China, whose retail tranche was increased to 30% after attracting demand for 21 times the shares available. MGM China, which is one of the six casino operators in Macau, raised $1.5 billion from its Hong Kong listing.

The strong demand meant that retail investors committed approximately $4.5 billion towards the Sun Art IPO — the largest amount of tied up funds since the IPO of Milan Station Holdings in mid-May. The small-cap retailer of second-hand luxury branded handbags raised only $35 million from its IPO, but retail investors subscribed for more than 2,100 times the number of shares earmarked for them, tying up $7.6 billion of capital. Since then, retail interest has been weak for most Hong Kong IPOs and on several recent deals, including Prada, Huaneng Renwables, and 5100 Water Resources Holdings, the retail portion hasn’t even been fully covered.

Sun Art, which is owned by Taiwan’s Ruentex Group and France’s Groupe Auchan, offered approximately 1.14 billion new shares, or 12.2% of its enlarged share capital, at a price between HK$5.65 and HK$7.20. At the final price of HK$7.20 it is top of the range, it is valued at a 2011 P/E multiple of to 31.5 times, which is slightly above its two key Hong Kong-listing comparables — Wumart Stores and China Resources Enterprises, which as of Friday were quoted at a 30.7 times and 30.2 times respectively. Both companies gained during Sun Art’s roadshow.

Wal-Mart, which ranked number two in China’s megastore segment last year with an 11.2% market share (Sun Art had a 12% share), trades at a significantly lower P/E multiple of 11.7, primarily due to the slower growth for its overall business.

Sun Art is the fastest growing and most productive company in its industry and at present it has identified and secured 121 locations in China for the opening of new megastores. It has 51 stores under development.

Sun Art’s IPO was led by Citi, HSBC and UBS as joint global coordinators, while BNP Paribas, China International Capital Corp, Goldman Sachs and Morgan Stanley joined them as join bookrunners. The company is due to start trading on July 15.

Bumi Armada was brought to market by CIMB, Credit Suisse and Maybank as joint global coordinators, with CLSA, RHB and UBS joining them as joint bookrunners. Its trading debut is scheduled for July 21.