Legend IPO Draws Closer, HK In Sight?
New reports on tech conglomerate Legend Holdings are raising the possibility that the company’s long-discussed IPO could be drawing near, offering investors a new choice that combines its core Lenovo (HKEx: 992) PC business with a wide range of other assets. Legend founder Liu Chuanzhi had previously indicated he wanted to list the company around 2015, but other recent signs sparked media speculation that the plan was being accelerated and could come later this year. (previous post) One of the biggest questions is still where the company will list, with China and Hong Kong as the 2 likeliest options.
The most significant element in the latest reports is news that Legend has officially completed its transformation into a limited stock corporation, a necessary step before it can offer shares to the public. (Chinese article) The company has also released detailed financials for its 2013 fiscal year, providing a taste of what the company has to offer for potential future investors.
Let’s take a closer look at those numbers starting with the bottom line, which saw Legend’s profit rise 20 percent to 2.1 billion yuan ($340 million) last year. Annual revenue rose by a slower 7.7 percent to 244 billion yuan. The company noted that both figures represented a slowing of growth rates from previous years, including profit and revenue growth of 30 percent and 20 percent, respectively, in 2012.
It’s worth comparing figures for Legend with those for Lenovo, which also recently reported its financials for its latest fiscal year that runs through the end of March. Lenovo’s latest annual profit rose 29 percent to $817 million, while revenue rose by a slower 14 percent to $38.7 billion. The stronger growth for Lenovo indicates that Legend’s other businesses are growing more slowly, and the company said in its report that its business was hurt in particular by widening losses at Hony Capital, its financial arm that is a major investor in Chinese tech firms.
Financials aside, Lenovo also said that it completed its transformation into a limited stock company in February, in an important step towards its goal of making an IPO. Reports earlier this year indicated that Legend was in the process of making a series of filings with various provincial authorities, in another necessary step that would have been consistent with a Hong Kong listing.
The addition of Hong Kong as a listing destination surprised a few people since Liu had been previously saying he wanted to list Legend in Shanghai or Shenzhen. But China was also in the midst of a year-long domestic IPO freeze at that time, which could have affected Liu’s decision, especially since hundreds of more cash-needy companies are now waiting to list in China.
All that said, let’s close out this post with a prediction of what’s likely to happen for Legend and how attractive it looks as an investment option. With regards to the first issue, a Hong Kong listing looks increasingly likely due to uncertainty with the broader IPO situation in China, where the regulator is reluctant to approve major new listings due to market weakness. We could also see a dual listing in Hong Kong and Shanghai later this year, and I would expect the total size of the float to reach up to $5 billion.
As to the second question, it does seem that Legend wouldn’t be especially attractive for investors. Anyone who likes the company might be better advised to invest in Lenovo, which is more focused on the gadget space. Hony is one of Legend’s other most high-profile assets, but its money-losing status is hardly a positive. However, that issue could be largely temporary as the company’s loss last year was largely due to broader market weakness that pushed down valuations of Hony’s investments.
Probably the most positive asset that Legend can offer is Chairman Liu Chuanzhi, a Chinese tech pioneer who runs the parent company but has left Lenovo’s operations to the younger Yang Yuanqing. But Liu himself is getting older, and thus is unlikely to be at the helm of the company too much longer.
Bottom line: Legend Holdings is likely to make a Hong Kong IPO as soon as later this year to raise up to $5 billion, but could get limited interest from investors due to its slowing growth.
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