The pipeline of Hong Kong initial public offerings keeps growing, with several key deals expected during the next couple of weeks. However, investor appetite for market newcomers has clearly abated, suggesting IPO candidates might be in for a challenge.
On Friday, the increasingly difficult environment for primary offerings claimed another casualty in the form of Yuanda China Holdings. The developer of curtain walls was due to fix the price of its $370 million to $537 million Hong Kong IPO on Friday, but instead it issued a statement after the market closed saying that it intends to “alter the terms” of the deal.
It went on to clarify that it might “reduce the size of the global offering and/or reduce the offer price”. If so, it will publish a supplementary prospectus, which will result in a short delay in the timetable. It didn’t specify when that might happen, although sources said the deal could be relaunched as soon as today.
The expectation, they said, is that Yuanda will return to the market with a deal priced at HK$1.50 per share, which would mean a 22% reduction from the low end of the original price range. If the number of shares remains constant that would imply a total deal size of HK$2.25 billion ($290 million).
Yuanda initially offered 1.5 billion new shares at a price between HK$1.92 and HK$2.78 each through BOC International, Deutsche Bank, J.P. Morgan and Standard Chartered. It was scheduled to start trading on Friday.
Bankers working on the deal said there was a lot of interest for the stock before launch, reflecting Yuanda’s solid fundamentals and its position as the world’s second-biggest developer of customised curtain walls, which are non-load bearing building facades that are often made of glass, aluminium, granite or other cladding materials. The industry is growing rapidly, particularly in China and the Middle East — two markets where Yuanda has a significant presence.
During the past three years, the company has completed 513 curtain-wall projects around the world, including well-recognised landmarks like the Bird’s Nest stadium and the Water Cube swimming centre that were both built for the Beijing Olympics.
The early feedback also indicated that investors liked the company’s focus on commercial buildings and public facilities, as opposed to the retail property market, which the government is trying to rein in. Commercial property projects are also typically less sensitive to rising interest rates.
However, investors have become increasingly wary about IPOs, as several of the recent deals above $100 million are trading below their issue price. China NT Pharma, which started trading on April 20, has fallen every day since its debut and is currently down 26%, while Hilong Holding, which debuted a day later, had lost 13.5% when Yuanda’s bookbuilding closed on Thursday. Hilong did gain 8.4% on Friday, however, and is now down just 6.2%.
This year’s biggest IPO, Hutchison Port Holdings Trust, which listed in Singapore on March 18 after raising $5.45 billion, has also had a tough debut and is currently 8.9% below its IPO price.
Adding to the disappointment, Hui Xian Real Estate Investment Trust, Hong Kong’s first renminbi-denominated IPO, fell 9.4% below its issue price when it started trading on Friday. Investors, many of whom were said to be buy-and-hold accounts, had been hoping that the Li Ka-shing-sponsored deal would at least hold around the IPO price.
Bankers say investors now want to see a few deals trade higher in the secondary market before they commit any more money. In the meantime, some have shifted their interest to placements in already listed stocks, which they can pick up at a decent discount — as evidenced by the robust demand for the four offerings in the market last Wednesday.
Indeed, Yuanda was not the only IPO to suffer last week. On Wednesday evening, China Auto System Technologies said it would postpone its Goldman Sachs-led global offering to a later date in light of the “continued market volatility”. The manufacturer of air-conditioning compressors was aiming to raise up to $92 million.
However, sources said many investors also felt that Yuanda’s indicated valuation was too rich and, as the broader market environment deteriorated, the deal never gained sufficient momentum to overcome that. The company’s lack of direct comparables also made the valuation more challenging — none of the other top five curtain-wall players globally is listed, and the companies that are listed are either not focused solely on curtain-wall solutions or are significantly smaller.
Syndicate analysts argue that Yuanda needs to trade at a premium to building materials and construction companies because it provides value-added services such as customised designs and is also offering one-stop solutions for customers. Based on the joint bookrunner consensus, the indicated price range translated into a 2011 price-to-earnings multiple of 9.4 to 13.6 times, pre-shoe. This compared with high single-digit multiples for most construction companies.
Looking at a wider universe of Hong Kong-listed construction companies and contractors, including the likes of Cheung Kong Infrastructure, Xinyi Glass Holdings and China State Construction International Holdings, the average P/E ratio increases to 11.2 times, according to one syndicate research report.
The company was aiming to sell 25% of its enlarged share capital, with 10% earmarked for retail investors. The retail portion of the deal was about 1.4 times covered, one source said. In the statement issued Friday, Yuanda said it will hold on to the money received by retail investors for now, which supports the talk that it will relaunch the deal this week. As per the prospectus, the company has until tomorrow to agree on a price with the global coordinators or the offering will lapse. However, it seems the company does have the option to extend that deadline if it issues a supplementary prospectus.
There was no information about the level of interest from institutional investors, although the fact that it didn’t price on Friday suggests that there wasn’t sufficient demand to cover the 90% institutional tranche even at the bottom of the range — at least not of the quality that the company was after.
Yuanda did have the support of one cornerstone investor, though, as Hong Kong-based fund management firm Atlantis had committed to invest $30 million.
The lack of demand for the recent IPOs — both in the primary and secondary markets — is bound to put more pressure on deals that are due to start marketing in the next couple of weeks, and may force them to lower their valuation expectations. The most imminent offerings include Shanghai Pharmaceuticals, which is already listed in Shanghai but is looking to raise between $1.5 billion and $1.8 billion from a Hong Kong IPO, and Macau casino operator MGM China, which is expected to start investor education for an offering of about $800 million to $1 billion today. MGM China’s IPO is being arranged by Bank of America Merrill Lynch, J.P. Morgan and Morgan Stanley, while Shanghai Pharmaceutical has enlisted China International Capital Corp, Credit Suisse, Deutsche Bank and Goldman Sachs to help with its Hong Kong listing.
Meanwhile, Glencore International is scheduled to start the institutional roadshow for its $9 billion to $11 billion IPO tomorrow. The commodities trading and mining company is seeking a dual listing in London and Hong Kong, and is being brought to market by Citi, Credit Suisse, Morgan Stanley, Bank of America Merrill Lynch and BNP Paribas.
