Shanghai-based Far East Horizon is set to be the very first Chinese leasing company to list in Hong Kong after raising HK$5.13 billion ($658 million) in a Hong Kong IPO last week.
The deal, which is the second-largest so far this year next to Hongqiao’s $822 million IPO, required investors and analysts to wrap their heads around funding channels for Chinese small and medium-size enterprises (SMEs), which is a sector that usually receives little attention from lenders.
Far East Horizon provides equipment-based financial leasing to SMEs, which is to say its customers can borrow against their operating equipment. The business model is in line with the Chinese government’s efforts to get financing to trickle down past the large or state-owned enterprises that are often favoured by the nation’s generous lenders.
SMEs in China, which account for roughly 60% of economic activity, often get the cold shoulder from the country’s lenders. They receive only about 30% of bank lending.
About 80% of Far East Horizon’s customers are SMEs that are engaged in printing, shipping, construction and machinery; approximately 68% of the group’s leasing business is from repeat customers, according to the company.
Far East Horizon sold 816 million primary shares at HK$6.29 each, above the mid-point of an indicated price range of HK$5.20 to HK$6.80, suggesting the company could raise between HK$4.2 billion and HK$5.5 billion.
Based on the company’s 2011 projected earnings, the final price pitches Far East Horizon at 15 times its price-to-earnings (P/E) ratio. That is more expensive than the valuations of Hong Kong-listed mainland banks. The Big Four banks, which include ICBC, Construction Bank of China, Agricultural Bank of China and Bank of China, are currently trading at an average of 9.25 times 2011 P/Es, and the most expensive Chinese banking stock -- China Merchants Bank -- is quoted at 12 times, according to data from Bloomberg.
In spite of the expensive valuation, the offering received good market demand and bankers hope the deal will mark a turning point for the city’s quiet IPO market. There have only been four sizable IPOs launched in Hong Kong so far this year. Besides Hongqiao and Far East Horizon, Chinese property developer Top Spring raised $200 million and China Kingstone Mining, a marble miner, pocketed $167 million in a new share sale.
About 200 high-quality institutional investors participated in the deal with many orders coming from finance-focused accounts. The books were multiple times covered, according to sources.
The company secured $250 million in cornerstone investments from six investors who have six-month lock-up periods. Prime Capital, Hillhouse and Value Partners each agreed to purchase $50 million worth of shares. Owl Creek agreed to invest $40 million; Sun Hung Kai and Och-Ziff each invested $30 million in the deal.
Investors were interested in Far East Horizon because lending to SMEs has growth potential. Far East Horizon also enjoys support from its controlling shareholder, Sinochem Group, which is one of the largest state-owned conglomerates in China; and that appeared to give investors comfort. The company is also backed by its strategic investor Kohlberg Kravis Roberts (KKR), which is a private equity group.
Far East Horizon plans to use the net proceeds to drive its financial leasing business.
The shares will start trading on March 30. CICC, HSBC, Morgan Stanley and UBS were joint bookrunners of the deal.
