The placement was the first by a Hong Kong listed company since tobacco flavouring firm Huabao International Holdings sold $196 million worth of shares in early August. It also coincided with a strong day in the local equity market that saw the Hang Seng Index add 160 points to return above the 17,000-point mark, which helped to boost interest in the sale.
The China retail sector remains a ôhotö sector with investors as retail sales growth continues to outpace the general economic expansion. And even though analysts argue that some of the listed companies are trading at rich valuations, demand remains strong because of the scarcity of shares available, especially in the premium segment where Parkson operates.
According to a source familiar with the offering, the deal attracted a few ôextremely goodö investor names shortly after it was launched yesterday morning (August 29), which together with the strong performance of the secondary market meant the bookrunners had ôthe wind behind themö from the beginning.
The order book was more than six times oversubscribed with Asian-based long-only funds participating both in breadth and size, the source says. European accounts were less prominent in terms of numbers but also contributed decent sized orders, while US-based investors werenÆt as visible given that the bookbuilding closed at 10pm Hong Kong time.
Most of the large funds already invested in the stock were said to have participated in the sale, which was jointly arranged by BNP Paribas Peregrine and Citigroup.
MalaysiaÆs Lion Diversified Group, which held a 65.5% stake in Parkson prior to the sale, offered 44.16 million secondary shares with an option to increase by 11.04 million. It ended up selling the maximum amount, which equalled 10% of the issued share capital, resulting in LionÆs ownership share dropping to 55.5%. The controlling shareholder, as well as the company itself, has agreed to a 180-day lockup following the deal.
The price was fixed at the top end of the indicated HK$23.60 to HK$24.20 range for a 6.9% discount to MondayÆs close of HK$26. Aside from HuabaoÆs offer, which was a bit special since the stock is in the process of repricing after a reverse takeover jolted it into a different industry, this was the widest discount for a Hong Kong placement since Sun Hung Kai Property priced its $1.01 billion sale of new shares 4.95% below the market price.
The more generous pricing may have been needed, though, as Hong Kong has seen only three block trades - evenly spaced with one transaction per month - since then and the market is just emerging from the holiday period. The fact that ParksonÆs share price has gained 162% since its listing in November last year and is currently trading just shy of the record high of HK$27.80 reached on August 3, would also have influenced the pricing.
The stock currently trades at 33.9 times projected earnings for 2006 and at 25.3 times its 2007 earnings forecast, which is slightly below the consensus valuation for smaller Hong Kong-listed peer Golden Eagle. The latter is quoted at a 2006 PE multiple of 36.7 times and a 2007 multiple of 30.2, according to Bloomberg data.
With a consensus target price ôjust shy of HK$30ö there could be about 15-18% share price upside from the placement price in the short-term and ôthese kind of retail names are generally expected to be strong in the fourth quarter,ö says one observer.
Parkson, which continues to expand its nationwide chain of department stores both through organic growth and acquisitions, is expected to see earnings growth of close to 30% next year, according to analysts. In the first half of this year it reported an 84% jump in net profit to Rmb196.2 million on an 87% rise in revenues to Rmb942.5 million.
Chinese department stores still have a low penetration rate, which leaves room for further expansion but some analysts argue that profitability in the sector may be reaching its peak.
ôIn the short and medium term the prospects for the company look very bright, but history has taught us that when an industry in China has high margins and high return on capital it will inevitably attract more competition,ö says one analyst who declined to be named. ôConsequently, the news stores that are opening are unlikely to be as profitable as the existing ones.ö
The type of investors who bought into the deal suggested there is longer term confidence in the stock, however. The strong demand also showed that the market is ready again for the right deals at the right price and bankers suggest there could be a flood of other block trades following Parkson if the secondary market holds up.
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