Yue Yuen spin-off and Chinese developer complete IPOs

Another two Hong Kong listing candidates have priced their initial public offerings, raising a combined $498 million and showing that the market is open for deals even though demand remains tepid and order sizes are smaller than they were a year ago.

Sportswear distributor Pou Sheng International (Holdings), which is a spin-off of Hong Kong-listed athletic shoe manufacturer Yue Yuen Industrial Holdings, was the most popular of the two and was able to fix the price slightly above the low end of the range at HK$3.05 for a total deal size of HK$2.51 billion ($322 million). The shares were offered in a range between HK$2.93 and HK$3.75.

Sources say the institutional tranche was more than three times covered and attracted about 100 investors, including accounts who already own shares in the parent. The 10% of the deal that was earmarked for retail investors was approaching a subscription ratio of about 1.5 times.

Retail investors were more sceptical towards property developer Central China Real Estate, and didnÆt take up the full 10% set aside for them. However, there was enough institutional interest to fill the gap, which means Central China will be the first Chinese developer to list in Hong Kong in more than six months. An achievement not to be dismissed after two other property companies - Changsheng China Property and Evergrande Real Estate Group - were forced to cancel their IPOs earlier in the year after a muted response from investors

Central China's offering was priced at the bottom of the HK$2.75 to HK$3.80 range for a total deal size of HK$1.38 billion ($176 million). The institutional book was close to 2.5 times covered, while the retail tranche was about 0.75 times subscribed. A source noted that this was not too bad as it likely means that there will be less stock flowing back into the market on the first day of trading.

The outcome is not too dissimilar to that of fellow developers Guangzhou R&F Properties and Shimao Property which also came to market amid extremely difficult conditions in 2005 and 2006. Both these deals required cheap valuations and only just managed to fill their order books, but ended up making a lot of money for the IPO investors. By the time the Hong Kong stockmarket peaked in October last year, these investors had seen their money double several times over. Even now, R&F is 75% above its IPO price, while Shimao is up 108%.

Central China was trying to attract investors based on the fact that it is the leading residential developer in Henan, which is ChinaÆs most populous province and a laggard in terms of both urbanisation and property prices. Investors also liked the fact that SingaporeÆs leading developer, CapitaLand, is a pre-IPO shareholder and will hold 27.1% at the time of listing.

The stock also came cheap at a 51% discount to the pre-IPO net asset value as estimated by sole bookrunner Morgan Stanley. At the start of the roadshow, most of its closest comparables traded at 40%-50% discounts to NAV. But by the time the deal was priced û after the US close last Thursday û share prices in the sector had fallen by another 10% on average, making Central ChinaÆs offering less attractive on a relative basis. On a 2008 price-to-earnings basis, the final price values the listing candidate at 7.2 times, compared with 5.7 times for smaller Aoyuan, 7.9 times for KWG Property, 8.1 times for Greentown China and 12.4 times for Country Garden, which is regarded as one of the sector leaders.

Pou Sheng, which is being brought to market by Merrill Lynch and Morgan Stanley, was priced at a 2008 P/E of about 17.8 times. This compares with branded sportswear retailers Li Ning at 30.2 times, Anta Sports Goods at 24.8 times and China Dongxiang, which owns the Kappa brand in China, at 19.8 times. Xtep, which completed an IPO of its own a week before Pou Sheng and is due to start trading tomorrow (June 3), was priced at the bottom of the indicated range for a 2008 P/E multiple of 17. The sector has been under pressure throughout Pou ShengÆs marketing period, which has reduced the newcomerÆs relative attractiveness somewhat.

Analysts say Pou Sheng deserves to trade at a discount because it doesnÆt have a brand of its own. On the other hand, it has an extensive distribution network û currently over 9,000 points of sale, including outlets operated by its 22 provincial joint ventures and sub-distributors û which offers sportswear products for a large number of top international and domestic brands such as Nike, Adidas, Reebok, Puma, Converse, Asics, Hush Puppies, Li Ning and Kappa. For several of these, including Adidas, it also has the leading market share in China and some argue that this makes it a more interesting consumption play than a retailer with a brand that isnÆt top tier or that well known.

It should also, they argue, trade at a premium to watch distributors Xinyu Hengdeli and Peace Mark, which have a similar business model to Pou Sheng, including no brands of their own, but operate in a sector with less exciting growth prospects. As of ThursdayÆs close, Xinyu Hengdeli was quoted at a 2008 P/E of 16.5 times, while Peace Mark traded at a fiscal 2009 (to March) P/E of 14.6 times, according to Bloomberg. Pou ShengÆs financial year ends in September, but its P/E numbers have been adjusted to a calendar year to make the comparison with other stocks a bit easier.

Pou Sheng sold 823.4 million shares, or 23.2% of the company, of which 90% went to institutional accounts and 10% to retail investors. Five percent of the deal was bought by Yue YuenÆs existing shareholders through a preferential offering that was part of the institutional tranche. A 15% greenshoe could lift total proceeds to $370 million.

Central China offered 25% of its share capital in the form of 500 million new shares, plus a 15% greenshoe that may boost the total proceeds to $202 million.

Both companies will start trading on June 6.