Late, and a few dollars short
Last week, I wrote about the delay in the launch of Shanghai Fosun Pharmaceutical's equity offering in Hong Kong. As expected at the time, book building finally started on October 16 for what is an accelerated timetable (owing to the upcoming bank holiday) that will now see pricing on October 24, and listing and start of trading on October 30.
The transaction, which is all for new money, is far smaller than the US$1 billion equivalent originally mooted, or even the US$800 million mentioned in April. At HK$11.80 per share, the bottom end of the price range, the base offer now stands at US$512 million.
The company, which is already listed in Shanghai, is one of the mainland's top five domestic pharmaceutical companies in terms of revenues, and its portfolio has 22 major products, focused on the five largest therapeutic areas in the mainland. It's also one of only two listed companies there among the top three in this industry sector, as measured by growth of sales, gross profit and operating profit.
Fosun is also the second-largest shareholder in Sinopharm Group, the mainland's largest health care distributor, with a 32.1 per cent stake. Indeed, at the bottom end of the range, this shareholding would account for almost 75 per cent of Fosun's market capitalisation, but with a price-to-earnings ratio entry point for Fosun that's only about half that for Sinopharm.
Comparable companies Sihuan Pharmaceutical, United Laboratories International and Lijun International Pharmaceutical trade on average at a 2013 P/E ratio of 14.6 times, while Fosun is now offered at a discount of between 15 per cent and 5 per cent of that level - for a company that's much larger.
Fosun Pharma is also focusing on hospitals. Having already bought the Anhui Jimin Cancer Hospital and the Guangji Hospital in Hunan, Fosun intends to acquire and operate high-end general hospitals that service expats and upper and middle class residents.
It has plans to buy two to three hospitals each year in the next three years, and to operate two large-scale hospitals, six medium-sized general ones and three speciality hospitals by 2017, contributing up to US$320 million to revenues.
This fast-growing, underserved market is estimated by research firm Frost & Sullivan to represent US$221.9 billion in 2016 for the out-of-pocket health care expenditure segment alone, with an expected compound growth of 13.2 per cent per annum between 2011 and 2016.
Fosun should be a prime beneficiary.
The two cornerstone investors in the Fosun IPO, Prudential and IFC, the investment arm of the World Bank, also featured (for Prudential, through its Malaysian arm) in the IHH deal. And while their combined commitments only account for about 16 per cent of the institutional tranche, anchor investors that have placed orders in the book should provide additional support.
Fosun's IPO may not end up being the blowout deal the market needs, but the deal was covered at the time of writing. While the offer price will ultimately be set by reference to the prevailing share price in Shanghai, the lower half of the price range provides good value in a defensive sector that's under-represented on the exchange - and with potentially attractive medium-term prospects.
The stock's fortunes are also linked to those of Sinopharm, with which it has a strategic partnership - and a counter that almost 60 per cent of the 22 brokers that research it rate as a "buy" or "outperform".
Philippe Espinasse, a former investment banker, is the author of IPO: A Global Guide (HKU Press)