A prospective $114 million to $149 million IPO for Shanghai Forte was withdrawn by lead manager HSBC this Sunday, the very day the 455.9 million share deal was scheduled to price. In a statement to the Stock Exchange of Hong Kong, the company cited weak market conditions as the reason for the cancellation, although investors say this was compounded by an aggressive valuation.
At HK$1.95 to HK$2.55 per share, the company was marketed on a 15% to 30% discount to NAV, or 1.3 times to 1.7 times price to book. Comparables, by contrast, currently trade as low as 0.4 times price to book and on 60% to 70% discounts to NAV.
As one specialist puts it. "Investors have become incredibly risk averse over the past two weeks. Had this company been sold at a price to book valuation of about 0.9 times 2003 earnings, it would probably have got done. But it was quite clear from an early stage that it erred on the expensive side."
Others agree that had Shanghai Forte been willing to drop its pricing, the deal could have been completed. However, the company was not willing to "sell itself short" and is now said to have decided it will take a view about re-launching the deal when markets pick back up.
On a relative basis, the retail book was said to have been weaker than the institutional book, with the two run on a concurrent basis.
"The most recent and only IPO from Asia so far this year was 20 times oversubscribed by retail investors, but still managed to fall below its issue price today," one observer notes. "Investors just didn't see the potential for significant upside from Shanghai Forte when the most recent IPO, Sinotrans, hasn't performed."
All market participants agree that Shanghai Forte's experience provides yet another example of how exceptionally difficult world equity markets are. There have been virtually no straight equity deals this year and South Africa Telkom, for example, cut the price range for an offering yesterday (Monday) in the hope of getting a deal done.
However, many question why HSBC left it until the pricing date to pull the deal when it was obviously not being well received some time before this. Typical of the comments was one senior investment banker who blamed the lead for overpromising and being unable to manage client expectations.
"The public excuse that the markets were difficult because of the threat of war is frankly hilarious," he argues. "It's not like the situation wasn't known a week ago before they launched the public offer. It's real pain in the ass because it means the market will be even more difficult for the rest of us."
This means that Soho China has also been left in a quandary. Lead manager Goldman Sachs convened an analysts meeting to update pre-deal research at the end of January, but since then has not instituted a formal timetable for the pre-marketing of a roughly $100 million IPO.
Both Soho and Shanghai Forte are regarded as well managed companies operating under the concept of land factories - maintaining small landbanks which are developed as fast as possible using pre-sales to fund completion. Like a manufacturing company, inventories are kept low and returns generated by efficiency of output.
However, it is not a concept with which Hong Kong investors are familiar and the idiosyncracies of the Chinese property sector have prompted divergent opinions.
Detractors believe Chinese property developers tend to be highly geared and undercapitalized with small income bases. As one analyst comments, "They all want to focus on earnings and divert attention away from the fact they have a weak asset base."
But at the same time, few disagree that Shanghai Forte and Soho China have delivered earnings consistency over their short history. And as one specialist concludes, "Shanghai Forte made a very good roadshow presentation in Hong Kong and attracted a lot of interest. But the fact is that it required a leap of faith investors were not prepared to make when markets are as bad as this."
