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One week ago, Sun Art Retail Group was making headlines as one of the most popular IPOs in Hong Kong this year, having just priced its $1.06 billion offering at the top end of the range after attracting significant oversubscriptions from both retail and institutional investors. Now, it looks like the company might be be remembered for something else entirely.
According to sources, the megastore operator will have to postpone today’s trading debut by a couple of weeks after it emerged it had made a mistake in its listing prospectus. While Sun Art hadn’t yet made an official statement last night, people familiar with the issue said the company had overstated its historical earnings per share by failing to take a recent stock split into account when making the calculation. In other words, it divided the net profit with too few shares, resulting in a significantly higher EPS than it actually had.
While the mishap shouldn’t really have an effect on investors’ overall view of the company — most people tend to look at the historical net profit trend on a total basis rather than on a per share basis — the Hong Kong stock exchange, in its quest to look out for retail investors, has deemed it serious enough that Sun Art will have to file a supplementary prospectus and give retail investors a chance to withdraw their orders. A new listing date has now been set for July 27.
Sources said yesterday that they didn’t think the delay would have much effect on the overall demand for the deal and institutional investors are said to have contacted the banks involved offering to take more shares, if any of the retail investors choose not to participate. The institutional portion of the deal attracted more than 500 investors, while the 10% retail tranche was 42 times covered. The latter triggered a clawback that increased the size of the retail tranche to 20% — the first clawback on a Hong Kong IPO since MGM China’s $1.5 billion IPO at the end of May.
The popularity of the deal suggests that most investors will stay in. Also, the share price gained 15% in grey market trading yesterday, indicating the stock will trade up in the secondary market as well. The grey market price quoted on Phillip Securities' website dropped to HK$7.66 from a high of HK$8.28 late yesterday afternoon after news of the delay started to trickle out. Sun Art fixed the IPO price at HK$7.20 per share, which equalled a 2011 price-to-earnings multiple of 31.5 times and a slight premium to its closest comparables.
However, it wasn’t clear yesterday whether retail investors will have to actively reconfirm their orders or whether they will remain in as long as they don’t request for their orders to be cancelled. The former typically results in some people falling out of the mix because they are not aware of what to do, or don’t get around to contacting the arrangers on time.
However, if the secondary market should fall sharply in the next two weeks, or valuations of Sun Art’s key comps were to come down significantly for whatever reason, then institutional investors might re-evaluate their decision and start to withdraw their orders as well. And then this could become a real problem.
The sponsors and global coordinators are ultimately responsible for the prospects, in this case Citi, HSBC and UBS. But the financial information in the prospectus is also the responsibility of the directors of the company and the auditor, which is KPMG.
In its accountant’s report published in an appendix to the prospectus, KPMG states that it has reviewed the unaudited interim financial information of the group, for the three years ending 2010 as well as the three months to March 31, 2011 and the corresponding three months of 2010. The review includes consolidated income statements, statements of changes in equity and cash flow statements. And its opinion was that the financial information gives “a true and fair view” of the group’s consolidated results and cash flows for the relevant period.
Yet, the incorrect information is there. Apparently it was detected by an anonymous person who alerted the stock exchange to it by letter. Even more embarrassing for the parties involved, it is on page four of the summary — the very first section of the document. A KPMG spokeswoman yesterday declined to comment on the issue.
We will never know whether lots of other people also noted the mistake and just ignored it, but the more likscent that most retail investors did not read the prospectus in such detail in the first place — if they read it at all. Hence it is questionable whether this really is the sort of thing that retail investors need to be protected from. Let’s hope that the market really doesn’t fall a lot before Sun Art finally starts trading, or the stock exchange might find itself in the awkward situation of having prevented retail investors from cashing in on what yesterday seemed like a pretty certain first-day gain.
