Hong Kong equity issue

IFR Asia Awards 2014
3 min read
Fiona Lau

The HK$6.8bn (US$878m) listing of China’s Luye Pharma Group was the closest anyone came to a flawless Hong Kong IPO in 2014.

Luye achieved an attractive valuation that left something on the table for investors, built a high-quality shareholders’ roster and more than justified its decision to switch from Singapore two years earlier.

At a time when most Hong Kong IPOs risked confusing investors with an overcrowded syndicate, Luye’s float also showed that a sizable deal can be neatly executed with only three banks.

Luye, which boasts a diverse range of traditional and Chinese medicines, delisted from the Singapore Stock Exchange in August 2012 at a valuation of about 18x forecast earnings. Almost two years later, bookbuilding for the 999.6m shares in its Hong Kong IPO opened at an indicative price range of HK$5.38–$5.92 each.

The fact that pre-IPO investors planned to exit through the IPO also added to the task. Of the shares on offer, 67% was primary and 33% was secondary. Among the selling shareholders were GIC, CDH, Luye Investments, Citic Private Equity and an entity New Horizon and AXA jointly owned.

The strength of Luye’s cornerstone tranche helped lure new investors to the IPO. Rather than the Chinese corporations that were a feature of many other listings during 2014, Luye drew early commitments from global investors, including healthcare specialists.

Six cornerstone investors subscribed to US$280m of shares. They were Value Partners (US$100m), OrbiMed Advisors (US$50m), Prime Capital (US$50m), Trivest Advisors (US$30m), Macquarie Funds (US$25m) and Minmetals Capital (US$25m).

More demand came from anchor investors, and the book was about two times covered within the first 10 minutes of bookbuilding.

Final orders exceeded 10 times the stock on offer, with over 290 investors participating, and over 40% of orders received no allocations.

Demand came from high-quality long-only investors, hedge funds, corporate investors and private wealth clients, but allocations were skewed towards long-only accounts, which took up 46% of the deal.

The overwhelming demand allowed the deal to be priced at the top of the marketed range at HK$5.92 apiece, or a 2015 P/E of 26.6.

At the final price, Luye shares were sold at a slight discount to a premium to key listed comparables.

Despite pricing at an aggressive valuation, the shares traded up on debut. The stock soared 13.2% above the IPO price on July 9, and finished IFR’s review period at HK$10.49 on November 14, 77% above the offer price.

Citigroup, Citic Securities International and UBS were joint sponsors. Citigroup, CLSA and UBS were joint global co-ordinators and bookrunners.

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