Brand management solutions firm BlueFocus Communication Group is to be the first company listed on China’s Nasdaq-style second board to seek a Hong Kong listing.
BlueFocus, which is listed on the Shenzhen Stock Exchange’s ChiNext board, secured board approval last Tuesday to list on the main board of the Stock Exchange of Hong Kong.
If successful, the transaction is expected to set a precedent for other high-growth mainland companies looking to access overseas capital.
The company plans to offer 25% of its enlarged capital, or about 322m H-shares, based on its current total equity of 965m.
That puts the proposed float at up to Rmb8.25bn (US$1.34bn), based on the company’s closing price of Rmb25.62 last Thursday.
The actual size of the deal, however, is more likely to be around US$500m, depending on valuations and market conditions, according to bankers on the transaction.
Credit Suisse and Morgan Stanley have been hired to arrange the planned HK listing, which could come as early as the first quarter of next year.
More to follow?
BlueFocus’s move has attracted a lot of attention on the mainland, as a successful Hong Kong listing of the company may encourage other ChiNext companies to follow suit, unlocking a potentially long pipeline.
Launched in 2009, ChiNext board has become one of the most dynamic markets in China’s domestic stock markets. In the past five years, about 400 companies have listed, triple the number of companies listed in Shanghai over the same period.
As those companies grow, many may wish to pursue a main board listing, but a switch from ChiNext to the Shanghai Stock Exchange is an untested process.
“A dual listing in Hong Kong will be ideal for companies that want to build up overseas platform for acquisitions and business expansion,” said a banker away from the deal.
This approach seems to fit with BlueFocus’s recent strategic moves. Last year, the company acquired a 19.8% stake in London-listed PR company Huntsworth for Rmb350m. Alongside its Hong Kong listing, the company also secured board approval to spend US$3m to acquire a 9.48% stake in US data company Blab.
“BlueFocus has a very strong equity story to tell, especially now it is expanding into the e-commerce business. This is exactly what international investors are interested in at the moment,” said a banker on the transaction.
In August this year, BlueFocus announced plans to acquire stakes in three e-commerce companies, namely Bay Line, Netops Technology and Shanghai Kaijie, and founded its own e-commerce company.
Valuation hurdles
The high valuation of BlueFocus’s ChiNext shares, however, may add difficulty to the transaction. This may also be a major obstacle for similar transactions.
“It makes sense for BlueFocus to go overseas,” said the banker away from the deal. “The question is: will the Hong Kong market accept the high valuations that ChiNext companies enjoy domestically?”
According to China Securities Index, as of November 6, the average P/E ratio for ChiNext board is 66.72 times, six times higher than the average on the main board of Shanghai Stock Exchange.
Shares of BlueFocus, for example, changed hands at a 2014 forecast P/E of 32.3 times, while Hong Kong-listed comparable Wonderful Sky Financial Group trade only at around 10 times earnings.
Easier access to domestic capital may also deter ChiNext companies from seeking a Hong Kong listing. China lifted a ban on follow-on offerings from ChiNext stocks earlier this year, which greatly eased the funding pressure for those companies.
“If they are only short of money, they can raise funds domestically now and enjoy a higher valuation than overseas,” said a banker.
BlueFocus intends to use the proceeds from the Hong Kong IPO for acquisition and business expansion in overseas, as well as to repay loans and replenish working capital.
In the first three quarters of this year, BlueFocus booked revenue of Rmb4bn, up 93% year on year. Its net profit rose 92% year on year to Rmb508m.