The 270.32 million share deal was priced last night (Thursday) near the top of its indicative range after institutional and retail books both closed roughly seven times oversubscribed. With Goldman Sachs as lead manager, the company raised a total of $142.45 million on an issue price of HK$4.10 ($0.53). A further 40.534 million shares are available via the greenshoe.
Despite the fact that all syndicate members reported strong interest in the deal, it was decided to leave a little upside on the table for investors and price just below HK$4.25 at the top end of the pre-marketed range. As one observer comments: "This is quite a small transaction and will not be as liquid as some of its predecessors, so the company was keen to keep a little back. Some previous Chinese deals also haven't performed as well as they might in immediate secondary market trading."
Preliminary splits show that about 50% of paper went to Asia, with the balance split between the US and Europe. By investor type, observers report that China funds dominated in Asia, while the US saw a smattering of interest from global tech funds.
"There was a lot of late demand from the US," one non-lead banker comments. "And as usual when investors saw how popular the deal was becoming, a lot of froth emerged at the end. The only problem with this deal is that there hasn't been enough stock to go round."
The social security fund controversy
In the final few days before pricing, the company's fundamental attractions were almost eclipsed over confusion about its use of proceeds. During a teleconference to promote the Hong Kong IPO, TravelSky chairman Yang Jun had stated that 10% of proceeds would be used to fund a special dividend to shareholders for the purpose of contributing to the central government's social security fund. He also added that, henceforth, all other listing candidates would be required to follow suit in what was then widely reported as a new IPO tax or levy.
Observers concur that such a move is indeed likely. "But the whole issue has been blown up out of all proportion and China's Ministry of Finance is very embarrassed," says one expert. "The fact is that there will not be a new law, simply a strong suggestion that companies might want to contribute to the fund in this way."
TravelSky has consequently stood out, not only because it is the first to make such a contribution, but also because it has done so through a primary (new) share offering. Most Mainland 'privatizations' have largely been primary share offerings. By contrast, China National Offshore Oil Corporation (CNOOC), which follows later this month, is planning to sell a mixture of primary and secondary shares. Of the 1.64 billion shares on offer, 200 million, or 12.1% of the total will constitute secondary shares that the parent company will then use for retirement benefits.
"TravelSky was only recently incorporated, so it wasn't in a position to sell secondary shares and decided to use money from primary shares instead," the specialist adds.
Plans for a national social security fund were first announced last September. Established under the direct administration of the State Council, the fund is viewed as a means of managing the rising pension liabilities of the millions of workers being laid off from SOE's (State Owned Enterprises).
"It's a very good way of keeping the country stable if you ask me," one banker concludes.
Global benchmarks
Excluding the greenshoe, TravelSky has sold a 31.9% stake. Four strategic investors have also purchased $40 million of the total number: Cathay Pacific; Singapore's SITA group; Sabre Holdings of the US; and Amadeus of Europe.
At HK$4.10 per share, the company has been floated on a price/earnings ratio of 12.5 times 2001 earnings and on an EV/EBITDA basis at 8.6 times 2001 earnings. In terms of its P/E ratio, it compares favourably to a global industry leader such as Sabre, which is currently trading at 18.3 times 2001 earnings, or on an EV/EBITDA basis of 8.1 times 2001 earnings.
As Matthew Fassnacht, JP Morgan's US-based sector analyst comments: "The B2B and B2C sector has done extremely well over the past three months. GDS companies like Sabre are up about 15% over this timeframe and should continue to do well going forwards.
"Concerns about the disintermediation of the travel business and the threat from the internet have faded somewhat. These companies are now steadily closing the gap with transaction processing companies like Concord and First Data. Where before, they were trading at a 50% to 70% discount, it is now more like 20% to 25%."
A second analyst adds, "The sector should do very well this year, particularly since airlines have just been charged the largest price per segment increase on record. Galileo has increased prices by 6% and Sabre by 9%."
Sabre, Galileo and TravelSky all operate back-end reservation systems (GDS) used by the travel industry to channel bookings to airlines' own internal systems. TravelSky also operates, but has not included in the listing vehicle, a front-end consumer portal enabling customers to bypass agents and book directly online.
Observers say that for investors there seemed to be little downside to a company with a steady income stream and no foreseeable competition. Established over a decade ago to pool the IT departments of China's domestic carriers, TravelSky now controls 99% of the domestic ticketing market and 70% of the international market.
It is controlled by CACI (Civil Aviation Administration of China), which in turn is overseen by CAAC (Civil Aviation Administration of China). Post IPO, CACI will hold 23.4% of the company's equity, with the country's three major airlines - China Southern, China Eastern and Air China - respectively holding 9.8%, 8.1% and 6.9%.
China's travel market is also on a fast upwards trajectory. Boeing predicts that revenue per passenger kilometre (RPK) will average an annual increase of 10.3% in China, compared to a worldwide average of 4.7%.
"This is a great way to play the growth levels, rather than investing in an airline stock where an investor needs to consider more cyclical factors such as fuel price trends," one specialist notes.
Many hope that the success of the deal will boost CNOOC which immediately follows it. "It was a very clever strategy bringing the deal out over Chinese New Year," one banker concludes. "It slipped in and captured the market's attention at a time when there was little competition."
Year-to-date, although the Hang Seng Index is up 7.078%, the China Enterprises Index is down 1.356%. Select stocks such as China Mobile have posted sharp increases (up 18.54%), but generally bankers conclude that H shares have pulled down the Red chips, which have been stronger performers.
