After a week of mostly gloomy news in the Hong Kong IPO market, the launch of Sun Art Retail Group’s global offering yesterday received an enthusiastic response from investors. According to a source, the deal was covered within an hour and by early evening Hong Kong time, it was multiple times subscribed. The company is seeking to raise between HK$6.46 billion and HK$8.24 billion ($831 million to $1.06 billion) ahead of a Hong Kong listing on July 15.
Global equity markets do seem to have stabilised somewhat in the past few days, but the key reason for the strong interest, observers say, is Sun Art’s market leading position in China. An operator of hypermarkets in China under the dual brands of RT-Mart and Auchan, the company is a pure play China consumption story and is viewed as “best-in-class” compared to other listed Chinese companies in the same sector. It is owned by Taiwan’s Ruentex Group and France’s Groupe Auchan and aside from having the largest market share it is also the fastest growing company in its line of business.
Even so, the bookrunners are taking no chances and have signed up no fewer than nine cornerstone investors to support the deal. Together they are buying $420 million worth of shares, which at the bottom of the price range accounts for just over 50% of the total offering. General Atlantic and Hillhouse, through its Gaoling fund, will each invest $70 million, while the other cornerstones, including Government of Singapore Investment Corp (GIC), Khazanah, Tiger Global Management and a unit of Bain Capital will each buy $40 million worth of shares.
On top of that, the 10% retail tranche can also be increased to as much as 35% if it is more than 50 times covered and to 20% if the subscription ratio exceeds 30 times. If retail investors subscribe to more than 10 times the shares earmarked from them, their allocation will increase to 15%. While Hong Kong retail investors have been reluctant to participate in most of the recent IPOs, Sun Art’s strong brand names and the positive feed-back from institutional investors may convince them to do so now.
That would reduce the number of shares available to institutional investors even further and may create a bit of a squeeze as they try to get a meaningful allocation. Already, the number of cornerstone investors had to be scaled back, and the names that were approved also didn’t get the full amounts that they were asking for. This may translate into additional orders during the bookbuilding.
However, the deal is not coming cheap — especially not at the top end of the range. The price is indicated between HK$5.65 and HK$7.20, which based on the joint bookrunner consensus for 2011 translates into a pre-shoe price-to-earnings multiple of 24.7 to 31.5. This compares with 29.9 times for Wumart Stores and 28.8 times for China Resources Enterprise, which are viewed as the two key Hong Kong-listed comps. Wumart’s share price has gained 9.9% in the past six sessions, including a 4.9% jump yesterday after Sun Art announced the details of its offering.
Wal-Mart, which ranked number two in China’s hypermarket segment last year with an 11.2% market share (Sun Art had a 12% share), is trading at a significantly lower P/E multiple of 11.7, primarily due to the slower growth for its overall business. Other international retail chains also trade at about 12 to 13 times this year’s earnings, while Sun Art’s peers in the A-share market fetch valuations of approximately 28 to 30 times, according to a banker.
Sun Art operates 197 hypermarket complexes across 21 provinces, autonomous regions and municipalities in China and will use about half of the proceeds to open new outlets. Another 30% will go towards the repayment of bank loans.
The company is offering approximately 1.14 billion new shares, or 12.2% of its enlarged share capital. The deal also comes with the usual 15% greenshoe that could boost the total proceeds to as much as $1.2 billion.
The remaining cornerstone investors are Arisaig Asia, Carmignac Gestion and Owl Creek Asset Management. Those who are investing $40 million will all be locked up for six months, while General Atlantic and Hillhouse will be subject to a 12-month lockup. The willingness to agree not to sell any shares for that long is a clear indication of the confidence investors have in the company — especially at a time when bankers say it is difficult to get funds to commit to any lockups at all.
The retail offering will open on July 4 and the final price will be determined after the New York close on July 7.
Citi, HSBC and UBS are global coordinators as well as joint bookrunners together with BNP Paribas, China International Capital Corp, Goldman Sachs and Morgan Stanley.
