Hong Kong’s IPO market has picked up momentum this week after two environmental companies successfully floated their shares.
Ozner Water, one of China’s largest water purification suppliers, secured $147 million in its offering, while Dynagreen Environmental Protection Group, a Chinese waste-to-energy company, raised $133 million.
Ozner’s offering was significant as it was the first Hong Kong IPO to price its shares at the top of the range since Poly Culture, China’s largest auction house, raised $331 million in March, and may represent renewed optimism in Hong Kong after WH Group scrapped its highly anticipated IPO and a series of companies experienced poor aftermarket performance.
Ozner’s institutional book was oversubscribed by 30 times, while the retail portion was 45 times covered, and triggered a clawback. Some 30% of the final book was made up of retail investors.
More than 132 institutions participated in the deal, a mix of long-only institutional investors and specialty funds, the majority based in Asia, followed by Europe and to a lesser extent, the US.
A combination of factors helped sell Ozner. Chinese markets are experiencing a rebound — the Hang Seng China Enterprises Index has gained roughly 6% in the past month. Locking in Och-Ziff Capital Management Group as a cornerstone investor also piqued investor interest in the water purification supplier, with the influential New York hedge fund pledging $40 million before the bookbuild began.
Most importantly, investors felt the pricing was attractive, a banker close to the deal said. Some 442 million primary shares priced at HK$2.7 each, the top of the initial HK$2.25 to HK$2.7 per share range under the leads of Goldman Sachs and Standard Chartered. The company, which has a market capitalisation of $600 million, is now trading at 18 times its forward 2014 earnings and 12.7 times its 2015 earnings.
This puts the water purification supplier at a discount to its closest comparable, Korea’s Coway, which is currently trading at 22 times 2014 earnings. It has a market cap of $6.5 billion, and is up 23% year-to-date.
Although Ozner has lower forward earnings forecasts than Coway, its future growth potential is much more substantial, a banker close to the deal said, arguing that the industry in China is still in the very early stages of high growth. The industry has the potential to grow in value to Rmb125 billion ($20 billion) by 2017 from Rmb54.4 billion in 2013.
Well-documented fears about the safety of China’s water supply will also boost residential usage to 32% by 2017 from 7% in 2013, and commercial usage to 28% from 12%. Some 60% of the mainland’s ground water and 40% of its lake water is unsuitable for human consumption, largely a result of pollution in the country.
“You can drink water from the tap in Korea but you can’t in China,” the banker said. “We believe, and clearly investors do as well, that the Chinese market is massive. [Ozner] produces ‘must have’ items.”
Ozner has experienced significant growth since it was founded in 2010, with full-year revenue increasing to Rmb402 million from Rmb102 million from 2011 to 2013.
Founder Shu Xiao remains the company's biggest shareholder after the IPO with a 26.4% stake, while private equity investors SAIF Partners, Ares and Goldman Sachs will maintain 19.84%, 13.86% and 8.24% stakes, respectively.
Green
Dynagreen, meanwhile, priced 300 million shares at HK$3.45 per unit on Friday, the middle of the initial HK$3 to HK$3.70 range. Demand for the waste-to-energy company was particularly robust among retail investors, with the public tranche oversubscribed by 53 times.
Retail investors made up 40% of the total book, with the remaining 60% made up of long-only institutional investors, China-focused funds and hedge funds. The institutional tranche was fully covered on the first day of the bookbuild.
Dynagreen’s HK$3.45 price per share values the company at $443 million, with a forward 2014 p/e of 16 times. It was a cheaper option for investors to its main comparable, China Everbright, which is currently trading at 27 times forward earnings.
All of the shares were primary, with the 300 million shares representing 30% of the enlarged share capital. CLSA was the sole bookrunner while Citic acted as the sponsor.
Similar to Ozner, retail investors clearly bought into Dynagreen’s story. It is in a promising sector — as Chinese get wealthier, they will produce more waste, and under the government’s Twelfth Five-Year Plan, waste incineration treatment capacity is set to double by 2015.
Given both deals relied on heavy retail participation, aftermarket performance may be volatile — retail investors tend to turnover stocks quickly. But solid contribution from long-only institutional investors should result in decent performance, one ECM banker told FinanceAsia, noting that the long-only investors and funds typically view environmental companies as long-term investments.
