Galaxy Securities, Sinopec Engineering to set tone for HK IPOs

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I was interviewed by Reuters and Bloomberg again to comment on the IPOs of China Galaxy Securities (US$1.1 billion) and Sinopec Engineering (expected to raise US$1.8 billion), which are indicative of a pick-up in IPO activity in Hong Kong.

Of course there are some technical factors behind the heavy immediate pipeline, and perceived mad rush to come to market, as issuers attempt to close their flotations before the summer break and their December year end accounts going stale at the end of June. No issuer wants to be compelled to update its financials if it can be avoided.

China Galaxy Securities

The Galaxy Securities IPO appears to have been well received by retail investors (with a public offer 15 times subscribed, triggering a claw-back from 10% to 30%), even if the company and its shareholder have taken no chances with pricing, perhaps in part a reflection a hedge fund-heavy book of demand – to some extent a by-product of the army of bookrunners (21) assembled to market the offering. The line up of cornerstone investors, however, included some quality names, probably attracted to the exposure to the A share market offered by what is really more of a “pure play” broker (83.6% of revenue for the year ended 31 December 2012 is from Galaxy’s broking business) that stands to benefit more quickly from a recovery in the Chinese markets than more diversified integrated financial institutions.

The IPO was priced towards the low end of the indicative price range, reflecting a price-to-book valuation of 1.24 times, as well as a 6% discount to Galaxy’s closest peer, Haitong Securities – a discount which narrowed from 14% throughout bookbuilding. Excluding the cornerstone investors, the institutional tranche represented approximately US$550 million and is said to have been a number of times subscribed, albeit with marked price sensitivity.

The Sinopec Engineering offering looks to have fared even better. Pricing is likely to be set to reflect a 2013 P/E of 9-10 times. The retail offering should increase from 5% to 7.5%, given the larger IPO size. Institutional demand is said to be of high quality.

How well these two deals perform in the coming weeks will clearly set the tone for further IPOs in Hong Kong, including three hotel/property business trust flotations: the Hopewell Hong Kong Properties Limited IPO, as well as those of hospitality assets owned by New World Development (with interests in the Grand Hyatt Hong Kong, Renaissance Harbour View Hotel and Hyatt Regency Hong Kong) and by Great Eagle’s Langham Hospitality Investments/Langham Hospitality Investments Limited (including the Langham, Langham Place and Eaton, all based in Kowloon) respectively (and on which I was interviewed last week by the South China Morning Post).

The Langham deal is currently in the market, with a rather wide yield range of 5.5% to 6.5% (which partly reflects yield enhancement by the sponsor). It will be particularly interesting to see if the Hopewell and New World IPOs manage to attract cornerstone investors (which the Langham deal offer structure doesn’t include, probably as a result of the lack of flexibility for lock-ups for Hong Kong IPOs – see my article published in the South China Morning Post on the subject in October 2012, “How lock-ups really mess the stock up“).

To read the Reuters article (“China Galaxy IPO raises $1.1 billion, priced for first day pop”, by Elzio Barreto), click HERE.

To read the Bloomberg article (“Sinopec Engineering said to raise $1.8 billion in IPO”, by Fox Hu), click HERE.