IPOs: Spring Air, Wanda Cinema Launch; Sinopec Eyes HK
Bottom line: IPOs this week by Spring Airlines and Wanda Cinema should debut strongly, and a proposed Hong Kong listing by Sinopec’s retail arm should also do well if broader market sentiment remains strong.
We’re only 2 weeks into the New Year, but already the IPO market is getting off to a roaring start with major new listings from budget carrier Spring Airlines and the movie theater unit of real estate giant Wanda Group. At the same time, other media are reporting that the newly spun off retail arm of oil refining giant Sinopec (HKEx: 386), already flush with cash from a major stake sale to private investors last year, is also eying an IPO in Hong Kong.
This unusual flurry of IPOs so early in the year is a direct result of extremely strong sentiment in both offshore and domestic stock markets towards Chinese firms. Companies are now rushing to take advantage of that sentiment, and the Chinese securities regulator is also taking advantage of a huge rally on domestic stock exchanges to try to clear a backlog of firms that have been waiting for years to make IPOs.
It’s a bit uncertain how long this surge in new listings will last, and the upcoming Chinese New Year means the current rush of new IPOs will probably only last for the next 2 weeks before taking a month-long break for the holiday. If China’s stock market shows signs of cooling in the months ahead, which seems quite likely, new approvals for domestic IPOs will also probably slow.
All that said, let’s look at the latest headlines that have Wanda Cinema Line and Spring Airlines among 22 companies that are making IPOs on domestic Chinese stock markets this week, aiming to raise about 12.2 billion yuan ($2 billion) combined. I like both of these companies, as each is privately owned and quite well run. My favorite is Spring, which is China’s oldest and most successful budget airline.
According to the latest reports, Spring is issuing 100 million shares at a price that translates to a price-to-earnings ratio of about 23. The company, which was previously said to be raising nearly $300 million, is quite profitable, posting a profit of 732 million yuan in 2013 and 270 million yuan in the first half of 2014. Its prospects should look even better this year due to plummeting oil prices that are one of its largest costs, and I expect the stock should debut quite strongly.
The picture looks slightly cloudier for Wanda Cinema, which had originally planned to raise 2 billion yuan in a Shenzhen listing, but has now scaled back the offering to about 1.3 billion yuan. (English article) The scale-back is certainly not a great sign, but looks similar to a downsizing for Wanda’s core shopping mall unit, Dalian Wanda (HKEx: 3699), in Hong Kong late last year. (previous post) I wouldn’t be too worried by the latest downsizing, which is probably more due to oversupply of new shares from so many companies now making IPOs. Accordingly, I would expect the Wanda Cinema IPO to also make a relatively strong debut.
Finally there’s Sinopec, whose retail unit was selected by Beijing last year to kick off a pilot program to inject more private money into big state-run firms. After selecting 25 partners last fall to purchase 30 percent of Sinopec Sales, which owns 30,000 gas stations and 23,000 convenience stores around China, Sinopec is now reportedly pursuing a Hong Kong listing for the unit. (English article; Chinese article)
Sinopec expects to select investment banks for the deal after the Chinese New Year. It hopes to raise more than $5 billion from the offering, which would complement the $17.5 billion it already raised through the 30 percent stake sale last year. Frankly speaking, I’m not sure why Sinopec is in such a rush to raise more money from this unit, which is already flush with cash from the previous stake sale. But assuming sentiment remains positive, this particular deal should also do reasonably well, since the retail arm is one of Sinopec’s most profitable units.
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