Macau Legend Development, a hotel and casino operator, has started the management roadshow and institutional bookbuilding for a Hong Kong initial public offering that is seeking to raise between HK$4.71 billion and HK$6.10 billion ($607 million to $787 million).
The deal launched on Friday last week and will remain open until June 20. The trading debut is scheduled for June 27.
The company, which is controlled by business entrepreneur and former Macau legislator David Chow and operates three casinos in Macau under a service agreement with Stanley Ho-controlled SJM Holdings, has signed up one cornerstone investor that has agreed to buy $35 million worth of shares.
The cornerstone, Dynam Japan Holdings, is an operator of pachinko game halls in Japan but is listed in Hong Kong. The company will be placing its pachinko games at the casinos operated by Macau Legend, which the latter hopes will help bring more Japanese clients. In that sense the cornerstone investment is quite strategic in nature.
Pachinko is similar to a vertical pinball machine and is played by firing small metal balls into the playing field of the machine, and into pockets that trigger the release of more pachinko balls.
In addition to the one cornerstone, sources say another few investors have been doing a lot of work on the company and are expected to act as anchor investors. However, they stress that this will not be a deal dominated by friends and family. Rather, it is expected to be a very institutionally-focused order book.
Macau Legend is raising capital to fund the construction of three new hotels with casinos at Fisherman’s Wharf, where it already operates the Legend Hotel and Babylon casino. The new hotels are expected to cost about $900 million and are scheduled to start operations in 2014, 2015 and 2016 respectively.
Fisherman’s Wharf is located on the Macau peninsula and is close to the main ferry port, which serves as the entry point to the territory for about 70% of all incoming passenger traffic.
The expansion is expected to more than double Macau Legend’s current number of gaming tables to about 350 from 150 today. It will also multiply its combined number of hotel rooms to 1,800 from around 400, making it the second largest provider of hotel rooms on the peninsula after SJM’s Grand Lisboa.
Macau Legend is offering 29% of its enlarged share capital in the form of approximately 2.05 billion shares. About 86.2% of the total are new shares, while the remaining 13.8% are existing shares that are being sold by David Chow’s mother.
The shares are marketed at a price between HK$2.30 and HK$2.98 apiece, which translates into an enterprise value-to-Ebitda multiple of between 3.8 and 5.1 for 2017, based on the average forecasts by the syndicate banks. The deal is being marketed on a 2017 basis since that is the first year when all its new casinos should be up and running.
However, because most analysts don’t have forecasts for other industry companies beyond 2015, the bookrunners are also providing 2015 EV/Ebitda multiples as a reference. On that basis, the price range values Macau Legend at between seven and 9.4 times.
SJM is trading at 2015 EV/Ebitda ratio of about nine times, according to Bloomberg data, which makes the top end of Macau Legend's price range look a bit pricy.
In light of the fact that Macau Legend is operating its casinos under a service agreement with SJM (previously referred to as a sub-concession), SJM is viewed as the key comparable in terms of valuation. SJM also bought a 4% stake in Macau Legend in August last year, which shows its confidence in the company.
In addition to its existing hotel and casino at Fisherman’s Warf, Macau Legend also operates the Pharaohs Palace Casino and a casino at the Landmark Hotel elsewhere in Macau.
The deal comes on the back of a couple of volatile weeks in Asian stock markets, led by a sizeable correction in Japan. But the jittery sentiment should be at least partially offset by the fact that gaming revenues in Macau reached their second highest monthly level ever in May. According to official government data, revenues increased 13.5% year-on-year to 29.6 billion patacas ($3.7 billion) last month, slightly shy of the 31.3 billion patacas generated in March this year.
CLSA is the sole sponsor as well as a joint global coordinator together with Citic Securities. Credit Suisse is joining them as a bookrunner.
