Sofa maker halves IPO size due to soft demand

Man Wah Holdings, a sofa maker and retailer, has cut its Hong Kong initial public offering to less than half the amount initially targeted following a decision by existing shareholders not to sell any shares amid the current weak market environment.

The targeted amount has been downsized to HK$1.64 billion ($212 million) from $317 million to $440 million, and the previous offering price range of HK$8.50 to HK$11.8 per share has been reduced to a fixed price of HK$6.80 per share, according to a new term sheet. The deal, which is arranged by Macquarie Capital, initially closed on Wednesday, but was relaunched with the new terms yesterday morning. The company, which makes recliner sofas, mattresses and bedding accessories, said it would keep the new fixed-price deal open until midnight yesterday.

In addition to the lower price range, the deal size has been reduced to 241.27 million new shares, or 25% of the company, from an original offer of 289.27 million shares, or 30% of share capital, as existing shareholders will not sell the 48 million shares that they were initially planning to offload as part of the IPO.

"The existing shareholders see more upside and more value in holding the shares," said one source.

Under the new terms, the sofa maker may raise up to $242 million if a 15% greenshoe option is fully exercised.

The revised offering price represents a price-to-earnings ratio of eight times forecast earnings for the current year, which is on par with Hong Kong-listed furniture manufacturer Samson Holdings. Samson's business is similar to Man Wah's in that it produces and sells wholesale furniture to the US and the United Kingdom.

By comparison, the previous offering price valued Man Wah at between 10.1 times and 14 times its 2010 earnings.

That original P/E ratio was about twice the valuation that Man Wah fetched before it de-listed from the Singapore Exchange six months ago, and was deemed too expensive given that the de-listing happened so recently. The Singapore bourse is also a weaker market than Hong Kong, sources familiar with the situation said. Man Wah listed on the Singapore Stock Exchange in 2005.

Trading in Hong Kong is now scheduled to begin on April 9.

Several Hong Kong IPOs have struggled in the secondary market this year, including Russia's Rusal and Canada-based SouthGobi Energy Resources, which both fell 11% in their debuts. Together with more general market uncertainties, this has made investors wary and new shares have become difficult to sell if priced too tight relative to industry peers.

"The economic recovery is mainly supported by government stimulus, the markets are very nervous and growth is weak. There are lots of uncertainties," Zhu Min, a deputy governor of the People's Bank of China, said at the Credit Suisse Asian Investment Conference yesterday.

Auto dealer Zhongsheng Group Holdings, which had previously hoped to raise up to $1 billion (although some people close to the offering say the deal size was only ever expected to be between $600 million and $800 million), also launched its IPO at a much reduced size after a delay of one week and ended up raising $369 million after pricing the deal near the bottom of the indicated range. Zhongsheng is scheduled to start trading today.

Separately, Fook Woo Group Holdings, a waste paper collector and recycled tissue paper maker, priced its Hong Kong IPO at the top end of the indicated range yesterday, raising HK$1.43 billion ($185 million). Fook Woo fixed the offering price at HK$2.30 per share, versus an indicative price range of HK$1.68 to HK$2.30. The final price represents a 2010 P/E of 12.5 times.

China's leading paper manufacturers, Hong Kong-listed Nine Dragons and Lee & Man Paper, which collect used paper from recyclers, are currently trading at 20 times and 55 times this year's earnings respectively.

The waste paper collector sold 620 million shares, including 500 million primary shares and 120 million secondary shares. Listing and trading of the shares is expected to begin on March 31. UBS and RBS were joint lead managers of the deal.

Despite weak market sentiment, the equity markets in both Hong Kong and Shanghai are expected to be flooded by a large amount of shares as many of China's big banks tap both the debt and equity markets for funds following a lending spree last year in support of Beijing's economic stimulus efforts.

Industrial & Commercial Bank of China (ICBC) plans to sell new shares and as much as Rmb25 billion ($3.7 billion) of convertible bonds to shore-up capital. The Beijing-based lender will sell six-year bonds convertible into yuan-denominated A-shares and will seek shareholder approval to issue new shares equivalent to as much as 20% of its outstanding equity capital, the bank said in a statement to the Hong Kong stock exchange yesterday.

Bank of China also said recently that it wants to issue more shares in Hong Kong soon. The bank, which is also listed in Shanghai, said the follow-on offer of Hong Kong-listed shares would account for up to 20% of its Hong Kong-listed share capital.