Movie technology developer IMAX China and intimate wear manufacturer Regina Miracle will be the first initial public offerings out of the gate in Hong Kong after the summer lull and should serve as a gauge of market sentiment for bigger deals to come.
July and August are typically slow months for Hong Kong’s equity capital markets as investors and bankers head off for their holidays. On top of this, China's markets have tanked over the past few months.
Despite a series of rescue measures by the Chinese government to stabilize the stock market – including rate cuts, currency depreciation, IPO suspension and relaxation of margin financing rules – the Shanghai Composite Index lost 42% over three months since mid-June. Hong Kong’s Hang Seng Index lost 21% in the same period.
As such, some companies that have been pushing for a Hong Kong listing before summer have turned cautious due to the significant downturn in market sentiment. There have not been any primary or secondary equity deals of real size since railway control system developer China Railway Signal & Communication priced a HK$11 billion ($1.42 billion) IPO in early August.
“Many companies have been conducting the so-called soft marketing since the summer break but not many are willing to take the lead to officially launch a deal,” a Hong Kong-based ECM banker told FinanceAsia. “We need one or two deals to fly before the big deals come.”
The Hong Kong stock exchange, which ranks top in terms of IPO fundraising year-to-date according to Dealogic, is looking to usher in a number of billion-dollar IPOs in the final months of the year. They include China Huarong Asset Management’s $3 billion IPO, China Reinsurance’s $2 billion float and CICC’s $1 billion deal.
IMAX wants a good China show
IMAX China, the mainland unit of Canadian cinema technology developer IMAX, started premarketing a roughly $300 million IPO on Tuesday, according to a person close to the situation.
Premarketing is expected to run for about 10 days, followed by a formal roadshow starting towards the end of the month. That said, the timetable remains fluid as the company awaits final approval from its New York-listed parent regarding details of the offer, the person said.
As the sole provider of IMAX format movies – digitally-converted films that show on larger-sized screens – IMAX China derives about a quarter of its revenue last year from the sale of IMAX systems to movie exhibitors. That business has been growing at a compound annual growth rate (CAGR) of 41% between 2012 and 2014, according to a company report.
Yet the largest revenue stream was from box office sales, which accounted for more than 75% of its total revenue last year.
IMAX China typically enters into 10-12 years of revenue sharing arrangements with exhibitors, allowing them to receive part of the box office revenue. Meanwhile, exhibitors are able to set higher ticket prices because of the higher quality IMAX format movies.
As of the end of June, close to half of the 251 IMAX theaters in China are under revenue sharing agreements with Wanda Cinema, a subsidiary of Chinese property conglomerate Dalian Wanda Group. The world’s largest exhibitor (having acquired US theatre chain AMC Entertainment in 2012) has committed to opening a further 85 IMAX theatres, according to IMAX China’s preliminary prospectus.
Driven by the strong growth of China’s box office, IMAX China reported net profit growth of 38.3% in 2013 and 42.6% in 2014. Analysts are expecting a 40% CAGR between 2015 and 2017 as the company further expands its theatre network in China.
By comparison, New-York listed parent IMAX may experience slower growth as the total box office in the US is expected to grow by less than 3% annually until 2017, after staying mostly flat over the last five years, according to consulting agency EntGroup.
Backed by strong growth estimates, IMAX China is likely to be marketed at a premium to its US parent in terms of valuation. A second source suggested a fair value range equivalent to 17.3-26.3 times forecast 2016 Ev/Ebitda for IMAX China, which will be about 44% higher than the current level where IMAX is trading on the New York stock exchange.
But that is a discount when compared to Huayi Brothers Media, a $7.9 billion market cap film producer and distributor currently trading at consensus 2016 Ev/Ebitda of around 27 times on the Shenzhen stock exchange.
“While the market environment in China brings a degree of added uncertainty to timing/valuation, the underlying strength of [IMAX's] China business gives us confidence the IPO will be successful,” JP Morgan analyst Townsend Buckles said in a research note.
Morgan Stanley is the sole sponsor of the IPO.
Regina hopes for miracles
Contrary to IMAX China, which builds on its own brand, intimate wear and functional sportswear manufacturer Regina Miracle will be seeking to leverage on the popularity of its clients in the run-up to a $250 million IPO.
Having started premarketing on Monday, Regina Miracle has a firmer timetable of launching the roadshow early next week and listing by the end of the month, the first source said. Under the current timetable it will be the first Hong Kong IPO since the summer break.
Regina Miracle said it operates under an innovative design manufacturing model that differentiates it from other original equipment manufacturers (OEM) and original design manufacturers (ODM). In addition to production and distribution, the Hong Kong-headquartered company provides early-stage R&D support such as market research, feasibility assessment and performance tests.
It manufactures intimate wear and bras to retailers including L Brands (which owns Victoria’s Secret), Under Armour, Hanes Brands and PVH, as well as sportswear to Reebok and Adidas.
Sales of intimate wear and bras accounted for 70.2% of the company’s total revenue last year, while production of functional sports products contributed to 11.3% of revenue in the same year.
Regina Miracle operates a similar business model to Hong Kong-listed Shenzhou International, a knitwear OEM headquartered in Shenzhen.
According to a source close to the situation, Regina Miracle’s fair value ranges between $1.1 billion and $1.6 billion, or roughly 15-22 times consensus 2016 earnings. The fact that IPOs are usually priced at a discount to fair value means the company should come at a discount to Shenzhou, which currently trades at 19.6 times on a rolling 12-month basis.
This should not be surprising given Shenzhou’s market cap is at least four times bigger than Regina Miracle based on the fair value range.
Similar to Shenzhou and other textile manufacturers, Regina Miracle is fairly sensitive towards exchange rate fluctuations because it would affect raw material and labour costs.
For example, Shenzhou has risen 54% year-to-date due to the depreciation of the renminbi, which dragged down its production costs domestically. On the sales front it also benefited from stronger foreign currencies because its products are sold to international clients and are denominated in currencies other than the renminbi.
It will be a similar case for Regina Miracle. A company research report estimates every 1% renminbi depreciation will lead to a 3% increase in earnings for FY2016 and 2% for FY2017.
The company is planning a new production facility in Vietnam to maintain its high earnings growth of 85% in FY2013 and another 61% in FY2014. It is also planning a separate facility in Jiangsu province in eastern China.
Morgan Stanley is the sole sponsor for the Regina Miracle IPO.
