Budget hotel group and facade contractor launch IPOs

While investors remain cautious in light of possible interest rate tightening in China this year, the primary equity markets are showing some signs of revival.

Several issuers that had been expected to come to market after the Lunar New Year holidays in mid-February were delayed as bankers felt investors who had lost money on earlier issues this year would not be keen to jump into other newcomers. However, with the secondary market edging higher over the past month -- albeit ever so slowly as the gains have been interrupted several times by slight corrections -- issuers seem to be regaining confidence in their ability to do an initial public offering.

Last Wednesday, automotive retailer Zhongsheng Group decided to go ahead with its IPO that was put on hold a week earlier due to the difficult and volatile market environment. Sources said a failure to agree on a valuation also played a role in the postponement. The fact that the roadshow was re-launched so quickly was viewed as a sign of confidence in the market, although the positives were somewhat overshadowed by the fact that the targeted deal size was halved versus earlier indications.

And today two more Chinese companies will kick-off the bookbuilding for their IPOs in Hong Kong and New York respectively, which together aim to raise up to $189.2 million pre-shoe. Both are small-caps, which could make them a harder sell among investors worried about liquidity in the aftermarket, but on the other hand, won't take as many investors to successfully complete in the first place.

The largest of the two is China Lodging Group, better known as Hanting Inns and Hotels, which is seeking to list on Nasdaq. The budget hotel operator has set a price range for a deal size between $92.25 million and $110.25 million. If a 15% greenshoe is exercised in full, the total proceeds could increase to as much as $126.8 million.

Meanwhile, in Hong Kong, Far East Global Group is looking to raise between HK$427.0 million and HK$611.6 million ($55 million to $79 million). The 15% greenshoe could boost the total funds raised to $90.8 million. Hong Kong-based Far East Global provides facade materials for buildings, particularly high-rises. The materials include curtain walls, glass walls and shop fronts, window walls, skylights and sunshades, as well as aluminium, stainless steel and granite claddings.

While a small company -- it will have a market cap of less than $250 million after the IPO -- it is a leader in its industry and competes with other international players for the top construction projects in the world. Examples of buildings it has worked on include the Venetian Macau Resort Hotel and the Four Seasons Hotel in Macau, the Palazzo and Mandarin Oriental hotels in Las Vegas, and the recently opened Burj Khalifa building in Dubai.

Far East Global is being brought to market by BOC International, while Hanting Inns and Hotels' IPO is being arranged by Goldman Sachs and Morgan Stanley.

Hanting doesn't offer a niche business like Far East Global and there are in fact already two Chinese budget hotel operators listed in the US. However, hotels is a well-known business among investors and the fact that there are two clear comparables to benchmark the newcomer against could be helpful as the markets remain uncertain. And budget hotel chains are still underrepresented in China, making it yet another way to play the China growth theme.

Hanting is offering 9 million American depositary shares, or 15.3% of the enlarged share capital, at a price between $10.25 and $12.25 per ADS. Each ADS corresponds to four ordinary shares. All the shares in the offering, including the greenshoe, are new. However, a group of existing shareholders, including CDH Courtyard and IDG Funds, have agreed to sell part (or in the case of Pinpoint, all)  of their shareholdings to Ctrip.com in connection with the IPO. Ctrip, which is one of the largest online travel providers in China, was co-founded by Qi Ji who also founded Hanting. Qi Ji is currently the executive chairman of the company and will himself own 49.1% of the company at the time of listing.

Ctrip will also buy approximately 7.2 million shares from Hanting and will own 8% of the company as a result of these share purchases, although the company has indicated that it may also place an order for additional shares in the IPO.

According to sources, the price range translates into an enterprise value-to-Ebitda of 9.7 to 9.8 times at the low end, and 11.7 to 11.9 times at the top end, based on earnings forecasts for 2010. At the low end, the price represents a significant discount to its US-listed comparables -- market leader Home Inns & Hotels Management, which has been listed on Nasdaq since October 2006 and was also founded by Qi Ji; and 7 Days Inn, China's second largest operator of economy hotels, based on information on its own website, which listed on the New York Stock Exchange in November last year.

At the top end, it will still come at a discount to Home Inns, which currently trades at about 14 times its 2010 EV/Ebitda, but at a slight premium to 7 Days Inn, which is trading at about 11.5 times.

Back in Hong Kong, Far East Global is offering approximately 361.9 million shares, or 32.3% of the enlarged share capital. The base deal is made up of 75.1% new shares and 24.9% secondary shares, while all shares sold through the greenshoe will be secondary. The price range of HK$1.18 to HK$1.69 translates into a 2010 price-to-earnings multiple between 8.5 and 12.2 times.

As usual, 10% of the deal will be set aside for Hong Kong retail investors.

Far East Global's IPO will be supported by China's largest construction company, China State Construction Engineering Corporation, which will participate as a cornerstone investor and has committed to buy up to $20 million worth of shares, up to a maximum 10% stake. At the mid-point of the price range, China State Construction will take up almost 30% of the IPO pre-shoe. According to a source, aside from the financial support, the two companies plan to deepen their cooperation on various projects in the future.

Far East Global is scheduled to price on March 24 and to list on March 30. Hanting is expected to price on March 25 and to start trading the following day.