All eyes were on the debut since the underground mall operator was the first company to list in Hong Kong in two months and the fact that the price held up would have come as a relief to most observers û especially since the Hang Seng Index fell 5.2% to its lowest close this year. Most of the Hong Kong IPOs since mid-May have slumped below their respective issue prices either immediately or within the first few sessions, leaving investors with huge losses and a high level of scepticism towards other newcomers. Another failure would, simply put, not have been good.
But with most of RenheÆs shares having been allocated to Chinese investors û many of whom are believed to be close to the company û it would have been unlikely to see much selling in the first few days.
According to a statement issued by Renhe on Tuesday, the retail tranche, which was meant to account for 10% of the total offer, was only 6.6% covered and the institutional tranche was also undersubscribed, which resulted in two existing shareholders of the company buying a combined 13.2% of the offer. While these two are free to sell at any time, it would have been extremely surprising if they had done that on the first day after coming in to ôrescueö the deal only last week.
The buying by the Chinese institutions late in the trading day came at a convenient time for BOC International, which is the stabilisation agent but is limited in the level of support it can provide because the overallotment option wasnÆt allocated due to the scarce demand. This means that at the start of the session BOCI had no shares it could buy back in case of a sudden drop in the share price, but was forced to rely on follow-through buying by some of the investors who bought into the IPO as well as on whatever paper it was able to pick up during trading.
As it happened, there was some modest buying in the first 15 minutes, which pushed the share price to HK$1.17 but then the price fell back and hovered at or just below the HK$1.13 IPO price for the rest of the morning (although from 11.15am onwards there was virtually no trading at all in the stock). In the afternoon the share price fell to a low of HK$1.09 before the late rally.
Also helping to support the deal was the modest valuation after the IPO price was cut to attract more investors into the deal after the initial offering period failed to draw enough orders. Based on the consensus forecast by the four bookrunners û BOCI, HSBC, Morgan Stanley and UBS û the final IPO price valued the company at 4.2 times its 2009 earnings, or at 10.5 times the companyÆs own earnings forecast for this year of Rmb1.9 billion (HK$2.2 billion), which hasnÆt changed despite the lower IPO proceeds and the latest market turmoil.
The deal was re-launched with an offer price 19.3% below the bottom of the original HK$1.40 to HK$1.71 range and kept open for an extra week. As part of this extension, the company had to give retail investors the chance to reassess whether they still wanted to be in the deal. Most did with 672 of the original 815 retail investors confirming that their earlier orders would stand û not too bad in an environment where global stock markets continue to rack up losses.
International investors were far and few between, however. Some say that including Warburg Pincus, which came into the offer as a cornerstone investor taking $50 million worth of shares, there were not even a handful of non-Chinese institutions left in the book when the extended offering period ended last week. This meant the shareholding structure looked more like a domestic Chinese offering than a Hong Kong IPO at the time of the trading debut, but at the same time, this may well have been what kept the stock above water on day one. It remains to be seen if the cross-the-board support will still be there in the long-run or whether more sellers will emerge. If they donÆt, turnover will likely remain thin and keep the stock off the radar for many international funds.
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