Chinese private school operator China Yuhua Education started officially pitching its Hong Kong initial public offering to investors on Tuesday, taking a cautious approach on its valuation despite the recent recovery in market sentiment.
After gauging investor interest for a week, the Henan-based school operator launched the 750 million-share offer with an initial fundraising target of between HK$1.5 billion and HK$1.9 billion ($191 million to $246 million) on a pre-greenshoe basis.
The shares are being offered at between HK$1.98 and HK$2.54 each, while the deal itself has a standard structure of a 25% free float, a 15% greenshoe option and a 90/10 split between institutional and retail investors.
Yuhua’s IPO comes at a time when Hong Kong’s benchmark Hang Seng Index is edging towards an 18-month high, signalling a recovery in market sentiment as China’s economy shows signs of acceleration. Official data shows China’s headline consumer price inflation and producer price inflation rose 2.5% and 6.9% respectively in January.
But despite the recovering sentiment, Yuhua has chosen to pitch a fairly conservation valuation. Bankers familiar with the transaction said the company is targeting a pre-shoe market capitalisation of $764 million to $984 million, which is equivalent to 13.1 times to 14.9 times Yuhua’s full-year earnings on a syndicate consensus basis.
That means Yuhua will list with an at least 18% discount to Hong Kong-listed international school operator Maple Leaf Education, which is seen as the closest comparable due to a similar business model and scale. Maple Leaf Education currently trades at 18.2 times earnings on a forward twelve-month basis.
The mooted valuation also implies a deep 34% IPO discount to its estimated fair value of $1.23 billion to $1.4 billion, according to syndicate analysts.
Yuhua’s valuation is, however, a highly market-driven price since the company has only accepted one cornerstone investment — a $50 million commitment from BOCOM Asset Management. That means nearly 80% of the shares will be offered to the public if the deal prices at the top of its range.
Yuhua’s cautiousness came as a surprise to some investors since the company is currently looking to expand. Yuhua said it will use as much as 83% of the IPO proceeds for building new schools, acquiring other school operators and upgrading existing facilities.
The equity financing will help clear Yuhua’s Rmb315 million ($46 million) debt on its balance sheet and turn into a net cash company, freeing it from approximately 5% interest costs per annum.
According to Yuhua’s marketing materials, one of the investment highlights is the firm’s ability to provide high quality education and charge premium tuition fees.
In the 2015/16 school year, Yuhua charges between Rmb12,000 and Rmb34,000 for every student per year, which is several times above the average tution fee of Rmb2,500 to Rmb8,000 for other Henan-based private schools.
The company has told investors it plans to expand outside Henan province to search for new growth drivers.
Yuhua will become the fourth Chinese school operator to list in Hong Kong when its shares start trading on February 28, turning the city into a bigger hub for the burgeoning sector in direct competition with the US.
New York remains the largest market for Chinese education firms, with some of the leading names such as New Oriental Education and TAL Education still trading there.
Citic CLSA is the sole sponsor of Yuhua Education’s IPO while CCB International and Bank of America Merrill Lynch are joint bookrunners.
