China Medical System Holdings, a Chinese pharmaceutical services company, is looking to raise up to HK$1 billion ($129 million) from a Hong Kong initial public offering to fund its business expansion.
The company is joining more than 10 other Chinese companies with plans to launch small to mid-size new share sales in the Hong Kong or US equity markets this month, suggesting there will be a fight for investor appetite for mid-cap Chinese enterprises.
The competition will be even tougher thanks to bigger names such as AIA Group and Xinjiang Goldwind, which are expected to resume the IPOs that they called off earlier in the year. The pan-Asian insurer halted its plans for a share sale when it became the subject of a takeover bid from Prudential. However, the bid eventually failed, depriving its owners of much-needed capital from a potential acquisition. Goldwind postponed its earlier offering due to the poor market condition at the time.
Given China Medical’s unique business model -- it makes very few products itself, but engages in marketing and promotion of prescription drugs in China -- investors will need to expand their research beyond the company to get the full picture of how China’s drug market works.
“People tend to mix it up with Sinopharm (a Chinese drug distributor). But [these two companies] operate in different parts of the chain. The margin for the marketing and promotion companies is significantly higher [than for the distribution companies] because they make profits from charging pharmaceutical companies,” said a source.
Shenzhen-based China Medical is offering 17.8% of the company, or 200 million shares, at between HK$3.6 and HK$5.06 apiece. That means the company could raise between HK$720 million and HK$1.01 billion. The deal comes with a 15% greenshoe option which, if fully exercised, would allow the company to raise HK$828 million to HK$1.16 billion by selling an additional 30 million shares. The base deal is made up of 170 million primary shares and 30 million secondary shares.
The indicated price range translates to 12.5 times to 17.6 times projected earnings for 2011, according to sources.
The company started bookbuilding yesterday. The final price will be fixed on September 20 (US time) and the trading debut on the Hong Kong exchange is scheduled for September 28. UBS is managing the transaction.
Founded in 1995, China Medical helps promote and raise awareness of pharmaceutical products among physicians; it offers pharmaceutical companies that lack the capability to commercialise or promote their products on their own, a way to efficiently bring these products to market. With a market share of 18% in 2009, China Medical is the largest pharmaceutical services company focusing on marketing, promotion and sale of prescription drugs in China, according to its preliminary IPO prospectus.
The company made a profit of $60.9 million last year and $37.2 million in the first six months in 2010. It plans to use the proceeds to increase its marketing and promotion network.
Another medical player, Shanghai-based MicroPort Scientific, which makes equipment for keyhole surgery, is said to be seeking about $130 million from a Hong Kong IPO this month. Credit Suisse and Piper Jaffray are managing that sale.
Last September, Sinopharm Group, the largest distributor of pharmaceutical products in China, raised $1.13 billion in a popular Hong Kong IPO, which received massive demand from both institutions and retail investors.
Sinopharm sold 545.67 million new H-shares representing 25% of the company. Strong demand enabled it to fix the price at the top of the HK$12.25 to HK$16 range, valuing the company at 25.5 times its projected earnings for 2010. The stock closed at HK$31 yesterday -- 93.7% above its IPO price.
