The HK$4.57bn (US$586m) listing of Chinese biologics outsourcing provider Wuxi Biologics was a blowout success, proving that a widely distributed deal could deliver a premium valuation long before the Hong Kong IPO market turned hot.
Wuxi played a key part in restoring confidence in the city’s IPO market, paving the way for higher-profile debuts in the second half of 2017, and did so without a liquidity-sapping cornerstone tranche.
The backdrop was hardly supportive when Wuxi priced its deal at the start of June. Only one company had completed a major listing since the start of the year, and Chinese brokerage Guotai Junan Securities was trading below its April offer price.
Wuxi also came with no listed comparables and the deal required a lot of investor education.
An aggressive valuation target also raised eyebrows. Parent company WuXi Apptec, formerly known as WuXi PharmaTech, had delisted from the US in a US$3.3bn buyout in December 2015, and was looking for a US$3bn valuation for the biologics unit.
Wuxi Biologics’ leading market position, high growth and the solid track record of its management, however, convinced investors to shrug off their valuation concerns.
As China’s largest biologics outsourcing provider, Wuxi works with 12 of the 20 largest pharmaceutical companies in the world. It had a 48% market share in China’s biologic services market in terms of revenue in 2016.
Its parent’s decent listing record also helped. Shares of WuXi PharmaTech, China’s biggest contract medical researcher, were trading at around US$40 before delisting, versus an IPO price of US$14.
The indicated demand before the launch was so strong that the issuer decided to go ahead with a float featuring no cornerstone investors.
Books were multiple times covered at launch on the first day of bookbuilding. Eventually, the deal was more than 25 times oversubscribed with more than 250 investors participating.
The overwhelming demand allowed Wuxi to price the 221.9m shares (88% primary) at the top of the HK$18.6–$20.6 range. The final price represents a 2017 P/E of 52.9 and a 2018 P/E of 31.2 after the greenshoe, a record valuation for a healthcare IPO in Hong Kong.
The top 10 investors, which were all high-quality long-only funds, took 40% of the allocations, while the top 25 investors took 60%. The retail tranche was about 38 times covered, triggering a clawback to 30% of the base deal.
Despite the heady valuation, the stock soared 37% to close at HK$28.25 on its trading debut on June 13. As of November 15, the stock closed at HK$43.70, 112% above the issue price.
Bank of America Merrill Lynch, China Merchants Securities and Morgan Stanley were the joint sponsors, joint global coordinators and joint bookrunners.
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