The Hong Kong listing of China Cosco Holdings (CCH) was priced at the very bottom of its indicative price range on Saturday (June 26) after struggling to attract demand. Under the lead management of HSBC, JPMorgan and UBS, a 2.244 billion share deal was priced at HK$4.25, the bottom of a HK$4.25 to HK$5.75 range.
The institutional order book is said to have closed just covered, while the retail order book was only 50% subscribed. This led the leads to seek a waiver from the Hong Kong Stock Exchange to reduce the size of the retail offering from 10% to 5%.
Overall, the deal closed three times covered, but this was largely thanks to Japanese retail investors, who threw in orders of $2 billion via POWL (Public Offering Without Listing) co-ordinator Daiwa SMBC.
As a result, the POWL received a relatively high allocation compared to recent precedent. The Japanese tranche was allocated 13% of the deal, while three cornerstone investors were allocated a further 32%. These comprised Hutchison Whampoa and Temasek Holdings with investments of $150 million each and Henderson Land, which took $100 million.
The remaining 50% was split between institutional and corporate investors, with the former allocated 40% and the latter roughly 10%. Observers say there were a total of 140 institutional and corporate orders, but no super jumbo orders.
As one specialist comments, "There was institutional support for this deal, but it was in smaller bite sizes. There were probably a dozen orders for more than $20 million."
By geography, the institutional book split 53% Europe, 30% US and 17% Asia.
The leads' ability to leverage the different demand bases in Asia meant CCH fared better than two other shipping companies in the market last week. In the US, for example, IPO's for TBS International and Eagle Shipping were both scaled back and priced below their filed ranges. The former priced at $10 per share compared to a $15 to $17 range and the latter at $14 compared to a $16 to $18 range.
From the outset, the main problem CCH had to face was investors' fears about the global shipping cycle. "No-one had any problems with the inherent strengths of China Cosco," reports one observer. "It all came down to whether the shipping cycle has peaked."
Ironically, the sector started to show signs of bouncing back during the very last few days of the bookbuild. The shipping indices started to re-bound on higher bulk rates and stocks were up 3% to 4% across the board.
This meant China Shipping ended up 2% from the start to finish of CCH's marketing period. Its sister company and port operator Cosco Pacific, was pretty much flat.
Unfortunately, by this time it was too late for CCH to build momentum. Observers say the IPO was also hamstrung by the presence of BoComm's listing. Says one observer, "During the first week of roadshows, investors were focused on BoComm's equity story and during the second they were all watching to see how it traded.
"Retail demand was also stymied by the bad weather," he adds. "A lot of money was tied up in BoComm, which didn't settle until a day before CCH closed its book. But an expected last minute retail top-up didn't occur on Friday because everyone stayed in doors thanks to the thunderstorms in Hong Kong."
At HK$4.25 per share, CCH has priced at roughly 6.5 times 2005 earnings and seven times 2006. After discounting the implied multiple of Cosco Pacific (in which CCH owns a 52.4% stake), the container shipping business has been valued at roughly three times on a 2005 basis. By contrast, China Shipping is currently trading at 3.5 to four times.
