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Hopewell Hong Kong Properties has pulled its Hong Kong initial public offering after the market and its closest comparables fell significantly during the bookbuilding.
The company, which is a spin-off from Hong Kong-listed Hopewell Holdings, closed the order books on Tuesday and was due to fix the price yesterday. But due to a lack of demand, it decided to postpone the $670 million to $780 million transaction, sources said yesterday.
It is the second company to call off a Hong Kong IPO in the past three weeks after auto parts maker Mando China, which was seeking to raise at least $213 million. In an announcement to Hong Kong stock exchange it referred to “adverse market conditions” and “significant market volatility” that had developed since the start of its global offering, and one source said yesterday that Hopewell HK Properties was likely to cite similar reasons for its decision.
The Hang Seng Index has fallen in eight of the 10 trading session since Hopewell HK Holdings launched the management roadshow and institutional bookbuilding on May 30 and has lost a combined 5.3%. But even more damaging, Swire Properties has dropped 11.4% and Hysan Development, which is regarded as the most similar to Hopewell HK Properties in terms of the type of properties it has in its portfolio, has lost 9.3%. Sun Hung Kai Properties, one of Hong Kong’s largest developers and a member of the Hang Seng Index, has fallen 9.8% and broken below HK$100 for the first time since August last year.
The sell-off has been triggered by a belief that the US is about to cut-back on its quantitative easing programme, which would remove some of the fuel for the strong rise in asset prices in the past 12 months. Yields on US Treasuries have been pushed higher as a result and that has weighed on interest rate-sensitive property stocks and trusts in particular.
The decline in share prices means the discount to net asset value (NAV) that these stocks trade at has widened, making Hopewell HK Properties look more expensive. At the start of the roadshow, Swire was trading at a 28% discount to its forward NAV, while Hysan was trading at a discount of about 38%, bankers involved in the offering said at the time.
Against that backdrop, it didn’t matter that investors generally liked the quality and growth potential of the properties held by the listing candidate, sources said yesterday.
Hopewell HK Properties is the holding company for Hopewell Holding’s entire property portfolio in Hong Kong, including two major development projects in the city’s Wan Chai district that are expected to be completed in 2015 and 2018 respectively. It was offered at a discount of 33% to 43% versus its 2013 pre-money NAV, based on the consensus forecasts among the five bookrunners. Including the money raised from the IPO, the discount would have dropped slightly to 29% to 38%.
Investors have also been watching the disappointing performance of Langham Hospitality Investments, which has fallen 14.4% below its IPO price since its debut on May 30. Being a yield-focused trust, Great Eagle-sponsored Langham isn’t directly comparable to Hopewell HK Properties, which is a property investor and developer that is viewed more as a growth play, but since it listed so recently it is having a negative impact on the sentiment for IPOs in general.
One source said yesterday that Hopewell HK Properties' institutional tranche, which accounted for 75% of the deal, was less than 85% covered. Some investors were said to have come in at smaller sizes than initially indicted or expected, while most of the accounts that had been sitting on the fence since the launch of the deal chose not to participate at all.
The 15% retail offering and the 10% set aside for a preferential offering to Hopewell Holdings’ existing shareholders are also believed to have been undersubscribed, although there were no official numbers available.
The demand was slightly better out of Asia. This may have been partly due to the fact that investors here are more familiar with the Hopewell group, which is controlled by well-known Hong Kong tycoon Gordon Wu, but the overall market had also gotten progressively worse by the time the roadshow reached London and the US.
Last night, the Dow Jones index fell another 0.8% to return below 15,000 points. Aside from a brief dip on June 5, the index hasn’t closed below that level since May 6. The volatility VIX index has gained 20% so far this week and currently stands at 18.6, indicating that sentiment remains jittery. The Hong Kong market was closed for the annual Dragon Boat festival yesterday, but other Asian markets were mostly in the red.
The bookrunners had virtually no room to restructure the IPO and perhaps re-offer it at a lower price since Hopewell Holdings’ shareholders had approved the spin-off on the basis that Hopewell HK Properties would have a market cap of at least HK$22 billion ($2.8 billion). At the bottom of the price range, the pre-money market cap would have been HK$22.95 billion.
After falling 10.8% since the start of the roadshow, Hopewell Holdings is also currently trading at a discount-to-NAV of about 47% to 48%, and it would make no sense to spin off the subsidiary at a wider discount than that as it wouldn’t result in any added value for the existing shareholders.
Hopewell HK Properties offered 340 million new shares at a price between HK$15.30 and HK$17.80 each. The deal accounted for 18.5% of the company, or 21.3% including the 15% greenshoe, which was already down from an earlier plan to sell about 30%. The reduction in size is expected to have been due to the market conditions and the fact that the parent company wasn’t keen to divest any more at the prevailing valuation.
The company currently owns 10 property projects — completed or under development — including Hopewell Centre, the group’s flagship retail and office tower in Wan Chai, and the KITEC retail, convention and exhibition centre in Kowloon Bay.
The portfolio also includes one hotel, a luxury apartment building and a new landmark hotel and conference project in Wan Chai — Hopewell Centre II — that is expected to be finished in 2018 and will cost about HK$9 billion to develop. Adjacent to that is 22 Queen’s Road East, which is an Urban Renewal Authority-sponsored redevelopment project that comprises 835,000 square feet and is also expected to cost HK$9 billion to complete. Hopewell HK Properties is developing this in a 50-50 joint venture with Sino Land.
The completed investment properties were valued at HK$27.5 billion ($3.5 billion) at the end of March.
After the spin-off, Hopewell Holdings would have been left with two property assets in China, a 1.2 gigawatt coal-fired power plant in the Guangdong province and its 68.1% stake in Hong Kong-listed Hopewell Highway Infrastructure, which builds and operates expressways, tunnels and bridges in China’s Pearl River Delta region. It would also still have had an 81.5% stake in the Hopewell HK Properties.
BOC International and Credit Suisse were joint global coordinators for the IPO, as well as joint bookrunners together with Citi, HSBC and J.P. Morgan.
The decision to call off Hopewell HK Properties IPO is a worrying sign for the other property sector listing candidates in the pipeline and the parties involved are likely to try to tie up as much investor demand as possible, in the form of cornerstones or anchor investors, before they decide whether to go ahead with these transactions or not.
In Hong Kong, bankers have been doing pre-marketing since last week of an IPO of about $250 million to $300 million for Carlyle-backed New Century Real Estate Investment Trust and on Monday this week pre-marketing started for NW Hotel Investments, which is aiming to raise $700 million to $800 million, according to sources. New Century Reit has a portfolio of hotels in China, while NW Hotel Investments will be the listing vehicle for three five-star hotels currently owned by New World Development.
And in Singapore, Singapore Press Holdings (SPH) and Overseas United Enterprise (OUE) are both in the process of gauging investor demand for two Reit offerings that are looking to raise about S$540 million ($432 million) and about $700 million, respectively.
