Youyuan shows IPOs can still get done in Hong Kong

Youyuan International Holdings, a Chinese manufacturer of wrapping tissue paper, has raised HK$645 million ($83 million) from a Hong Kong initial public offering. The offering, which was priced on Thursday last week, comes in the wake of several other Hong Kong IPOs being either postponed or cancelled and shows that new listings can still get done even in the current volatile environment.

To be sure, this was a small deal, although often it may be even more difficult to drum up interest for a small offering as it can be expected to be a lot less liquid. And liquidity is something investors tend to prioritise when the secondary markets are volatile.

Between April 26, when the investor education started for Youyuan, and the final day of marketing last Wednesday, the Hong Kong stock market fell 10% and the H-share index was off 11%. NVC Lighting Holding, which was one of the few listing candidates to complete its IPO the previous week, closed down 2.9% at HK$2.04 in its trading debut on Thursday after trading in a range between HK$2.00 and HK$2.21 during the session.

But Youyuan's leading position in its market segment, an attractive valuation versus its closest comparables and a $15 million cornerstone investment by fellow Chinese paper manufacturer Hengan International, helped get the deal across the line.

Fujian-based Youyuan sold 250 million new shares, or 25% of its enlarged share capital, at HK$2.58 apiece. The price was fixed at the bottom of the indicated range between HK$2.58 and HK$3.38. The final price values the company at about 10 times its projected earnings for 2010, which marks a significant discount versus the median price-to-earnings multiple of 14.1 times among other Hong Kong-listed paper manufacturers, including Hengan.

The 10% retail tranche, which accounted for just $8.3 million, was just over three times covered, according to a source, while the $60 million institutional tranche (excluding the cornerstone investment) was said to have been comfortably oversubscribed. Most of the demand came from Asia, but with some participation both from Europe and the US, and about half of the orders came from long-only funds. The rest of the shares went to a combination of hedge funds, private banking clients and high-net-worth individuals.

One source noted that additional reasons why investors took a liking to the company included its strong research and development, experienced management and its ability to use recycled raw materials. Wrapping tissue paper is primarily used in the retail industry for wrapping various items, including clothing and fruit. According to the listing prospectus, Youyuan was the largest among the major wrapping tissue paper manufacturers by production output in 2008 and achieved a market share by output of approximately 14.0% for machine-finished tissue paper, and 5.3% for other wrapping tissue paper. Wrapping tissue paper makes up about 21.4% of the total packaging paper segment in China, which in turn accounts for approximately 7% of the country's total paper and paperboard products industry.

As of the end of 2009, the company operated 16 paper production lines with an aggregate annual production capacity of approximately 124,440 tonnes. It has bought and installed four more production lines so far this year and plans to add another nine lines by the end of 2012. Together, the 13 new lines will boost its total capacity to 209,250 tonnes.

In the past three years, its revenues have expanded at a compound annual growth rate of 64.6% to Rmb724.8 million ($106 million), while its net profit has grown at a CAGR of about 100% to Rmb170.7 million.

Youyuan may sell a further 37.5 million shares (15% of the base deal) if the overallotment option is exercised in full, which could boost total proceeds to about $95 million. The shares are scheduled to start trading on May 27.

HSBC was the sole bookrunner for the offering and also arranged the $198 million IPO for NVC Lighting together with Goldman Sachs.