Link Reit priced its IPO at the top end of a HK$10.51 to HK$10.83 indicative price range this weekend, raising gross proceeds of HK$23.7 billion ($3.04 billion) for the Hong Kong government post greenshoe. The 2.1889 billion share deal broke a number of records including: largest ever global Reit IPO by a factor of five; most aggressively priced Reit IPO relative to NAV; largest Asian equity deal of 2004; largest Hong Kong government privatization to date and largest retail order book.
Total demand for the deal amounted to $75 billion, just shy of the $80 billion accumulated by China Life this time a year ago for a similarly sized $3 billion IPO. However, China Life attracted a smaller retail order book of $25.2 billion and overall like-for-like comparisons between the two are fairly meaningless since institutional orders for Link Reit were capped at $50 million each.
Without the cap, specialists believe the order book would have easily soared past the $100 billion mark. To put its achievement into perspective, Link Reit attracted the equivalent of nearly one month's trading volume on Asia's biggest and most liquid stock exchange.
The biggest losers of the painful allocation process that ensued were global institutional and corporate investors, which were allocated just 9.9% of the overall deal, or $297 million. Of the 670 accounts that placed orders, about two thirds are said to have received an allocation of some form or other, which was weighted in favour of tier 1 accounts.
A further 24.7% of the deal was allocated to nine cornerstone investors and one strategic investor, CapitaMall Trust. The former were allocated 18.7% or $561 million and the latter 6% or $180 million. The cornerstone investors will be subject to a six-month lock-up and overall institutional and cornerstone investors placed orders for $40 billion.
The second biggest loser was the POWL (Public Offering Without Listing) in Japan, which was predictably scaled back to almost nothing. Just 0.7% of the deal ($20 million) was allocated to Japanese retail investors - so often treated as little more than a safety net for Asia's bigger and more difficult equity offerings. Daiwa SMBC was POWL manager.
The Hong Kong government's main priority was its own retail investor base, which will receive shares at a 3% discount to the HK$10.83 IPO price. Retail investors will be allocated the remaining 64.8% of the deal ($1.944 billion), of which 56.5% went to the public offer tranche and 8.3% to the Mandatory Provident Fund scheme.
In a bid to make sure the deal is not viewed as a middle class subsidy, all retail investors will receive at least one board lot and allocations have been weighted in favour of smaller orders. The government is said to have received just over 500,000 retail applications in total, less than it did for the MTR Corp privatization in September 2000.
In 2000, the MTR Corp's $1 billion deal attracted just over $600,000 retail applications and a retail order book of $6 billion. The average order size then was $10,256.
But the big difference between September 2000 and December 2004 is the level of margin financing Link Reit has attracted. Based on an order book of $35 billion and 500,000 individual orders, Link Reit has an average order size of $70,000.
However, specialists report that 80% of the retail book came from just 5% of the investors who submitted orders. On this basis, the average order size for the vast bulk of the retail order book is more like $1 million.
At HK$10.83 per share, Link Reit has been priced on a 2006 dividend yield of 6.65%. This values the deal at an 8.1% premium to NAV, the most aggressive IPO pricing ever by a Reit.
The best secondary market comparables are the two Singapore listed Reits with a retail focus - CapitaMall Trust and Fortune Reit, which is actually composed of Hong Kong shopping malls.
CapitaMall Trust closed Friday at S$1.67, up 16.78% year-to-date. At this level, it is trading on a 2006 net dividend yield of 6.24% and at a 49% premium to current NAV.
Fortune Reit closed Friday at HK$6.3, up 28.57% year-to-date. This equates to a 2006 net dividend yield of 5.22% and a premium of 20% to NAV.
If Link Reit can replicate the success of the Singaporeans, then there could be considerable upside from IPO pricing levels. The huge institutional scale backs also means funds are likely to step into the market to absorb selling pressure from retail investors hoping to make a fast buck.
Listing is scheduled to take place this Thursday. The one potential hiccup is a judicial hearing convened today (Monday) on behalf of shop owners, angry at the rental hikes professional management are likely to implement over the government's former car parking and retail assets. The petitioners have argued that the Hong Kong Housing Authority does not have the right to dispose of its assets under the Housing Ordinance.
Specialists, who believe the petition does not have substance, hope it will not take the shine off the government's success. "The Hong Kong government has topped and tailed 2004 with incredibly successful and innovative capital markets transactions," says one. "At the beginning of the year, it bought the Link Securitization to market and at the end of the year, the Link Reit."
Lead managers for Link Reit are HSBC, Goldman Sachs and UBS, with JPMorgan acting as financial sponsor on behalf of the government.
