The closely-watched initial public offering of local nightclub and disco operator Magnum Entertainment has drawn strong interest from both institutional and retail investors following the runaway success of a slew of small-cap listings since late last year.
Established in 2007, the club operator controlled by local businessman Yip Mow-lum, the chairman of Hong Kong-listed brokerage firm Bright Smart Securities, was swamped with buying orders from investors who used margin funds to increase their purchasing power. This resulted in the IPO being oversubscribed more than 1,200 times, making it one of the biggest oversubscriptions of the past year.
The size of Magnum's offering is fairly insignificant but the share sale, estimated at between HK$84 million and HK$126 million, could be the first of its kind in Hong Kong's capital market. It may also draw a lot of interest in its unique business model given soaring rents in Lan Kwai Fong, the city's popular spot for trendy bars and eateries in Central.
Market participants said a number of fund management firms and billionaire Cheng Yu-tung's Chow Tai Fook had pledged sizeable orders for the night club listing although there was no official announcement to confirm this.
Shares of two newly listed firms - children's apparel retailer Miko International and Nanjing Sinolife, a mainland nutritional supplements retailer - surged 23 per cent and 33 per cent respectively in their trading debuts today.
Compared to disappointing mega offerings, small-sized IPOs like afterlife services firm Fu Shou Yan and a number of drug and technology stocks have surprised investors with shares trading well above their offer prices. Shares in Fu Shou Yan are up 44 per cent since listing last month, while China Everbright Bank, the biggest IPO deal for Hong Kong last year, has fallen 6 per cent.
Magnum, which plans to open its fourth club in Central, is offering 75.6 million shares at an indicative price range between HK$1 and HK$1.50 apiece. According to the listing document, the shares will be priced on January 16 and are scheduled to begin trading on January 23.
The firm, which announced a one-off dividend payment of HK$10 million to existing shareholders before listing, said its revenue for the first nine months ended December 2013 was 5.3 per cent below the same period last year, raising questions about its long-term operating condition due to lofty rental costs.
For the 12 months ended March 2013, net profit dropped 4 per cent to HK$28 million from the same period a year earlier, even though revenue grew 27 per cent to HK$174 million for the same period, it said in its listing document. The fall in profit was mainly due to a surge in rental and advertising expenses.
Net operating cash flow fell to HK$21.9 million in March 2013 from HK$31.3 million in the same period a year-before, and further slid to HK$5.4 million in August 2013. Gross margins though stayed above 80 per cent for the past three years, thanks to an increase in liquor prices.
Matthew Kwok, chief strategist at China Yinsheng Wealth Management, expects shares in Magnum to rise sharply on their trading day but urged investors to take profits off the table because newly listed small-cap stocks do not have the fundamental track record to underpin their values.
Analysts said it will be a challenge to judge future prospects and share performance of a nightclub operator, especially after Milan Station, a local second-hand high-end luxury item retailer, announced last month that it discussed a takeover with a third-party buyer shortly after it went public in May 2011.
Shares of Milan Station were also up sharply on its trading debut but have dropped more than 45per cent since listing after it issued several profit warnings.