China's Luye Pharma Group has met with strong institutional investor interest and secured six cornerstone investors ahead of its planned initial public offering in Hong Kong.
Luye Pharma is looking to raise up to HK$5.9 billion ($764 million) by pricing 999.6 million shares, or 30% of its enlarged share capital, at between HK$5.38 and HK$5.92 a unit -- a figure that could rise to $878 million if a 15% greenshoe option is exercised.
Early indications are positive with the institutional book roughly two times covered just ten minutes after the books opened Monday and orders coming in across the HK$5.38 and HK$5.92 price range, according to sources close to the deal.
Hong Kong fund house Value Partners agreed to purchase $100 million worth of shares. Value Partners, along with the other cornerstones — OrbiMed Advisors, Prime Capital, Trivest Investment, Macquarie Funds and Minmetals Capital — have altogether pledged $280 million.
Retail books open Wednesday and the deal is scheduled to price on July 2 after the New York close. The institutional/retail split will be 90/10.
The company is being marketed at 24.2 to 26.6 times estimated 2014 earnings, based on the joint syndicate forecast, which is broadly in line with where other Chinese pharmas are trading, according to Bloomberg.
Citi, Citic/CLSA and UBS are the lead managers and just over two-thirds of the shares on offer are primary.
Selling shareholders include private equity backers — CDH Capital, Citic Private Equity and New Horizon Capital — who took a majority stake in the-then Singapore-listed Luye Pharma in 2012 before taking the company private later that year. Other selling shareholders include the Government of Singapore Investment Corp (GIC) as well as Chairman Liu Dian Bo, according to a term sheet.
The cornerstone investors and selling shareholders are subject to a six-month lockup.
Comparable pricing?
Investors have a number of comparables when considering Luye Pharma, which sells over 50 drugs for oncology, cardiovascular, orthopaedic, gastroenterology and central-nervous system patients.
Sihuan Pharmaceutical, a Chinese manufacturer of cardio-cerebral vascular drugs, is currently trading at 24.2 times estimated 2014 earnings. Its shares are up 28% so far this year.
Sihuan, like Luye, was previously listed in Singapore but was delisted in December 2009 through a privatization process handled by Morgan Stanley Private Equity Asia, which owned 10% at the time. Almost a year later in October 2010, Sihuan raised $741 million after pricing its shares at HK$4.60 a unit, the top end of the indicated range.
Sino Biopharmaceutical, a manufacturer of treatments for ophthalmia, hepatitis, dermatitis and other illnesses associated with aging, is trading at a similar 2014 price-earnings ratio of 24.5. Shares are down 4% so far this year.
CSPC Pharmaceutical — which started out as a manufacturer of bulk drugs such as penicillin and vitamin C — has transformed itself into a producer of innovative and branded drugs, having recently developed an oncology drug division and is the most expensive of Luye’s comparables, currently trading at 27 times its forecast 2014 earnings. Shares are up 2% year-to-date.
Although it is being offered at a discount to CSPC, bankers say the Luye’s forward earnings still represent a slight premium to Sihuan and Sino, largely due to the company’s tremendous growth potential.
China’s aging population, increasing urbanization and higher incomes are creating great demand for pharmaceutical products. This, coupled with government pledges to support the development of a medical insurance industry, have made institutional investors and hedge funds very positive on the sector.
Proceeds will go towards expanding its pharmaceutical product lines, research and development and future acquisitions, according to the term sheet.
Other deals
It’s been a difficult year so far for Hong Kong IPOs, capped off by WH Group’s high-profile flop in April. Since the pork producer failed to list, however, more issuers have successfully completed IPOs, largely due to lower pricing. This has restored some confidence among institutional and retail investors.
Most recently, Cosmo Lady raised $178.8 million after pricing its shares at HK$3.60 per unit, the middle of its initial HK$3.27 and HK$4.42 per share range. Demand for the Chinese lingerie manufacturer was robust, with the institutional book three times covered on the first day of the bookbuild on June 16.
High-end women’s fashion designer Koradior Holdings, meanwhile, priced 125 million shares at HK$4.20 a unit, also the middle of its HKR3.05 to HK$4.51 per unit range, and locking in HK$525 million ahead of its June 27 listing.
