Bottom line: CGN’s shares are likely to rise 10-15 percent on their first trading day next week, while JD.com’s shares could rally over the next few days before resuming a longer downward trend towards their IPO price.
Just when the year-end rush of new share offerings appeared to be losing momentum with weak demand for property developer Dalian Wanda, the market is getting a lift with a stronger reception for 2 other share sales. The first of those has seen nuclear power plant builder CGN Power price shares for its IPO at the top of their range, making it the largest new Hong Kong listing in 2 years. The second deal saw strong demand for a secondary offering by e-commerce giant JD.com (Nasdaq: JD), helping it to raise another $619 million following its IPO back in May.
These 2 latest news bits show investors are becoming more selective towards new share sales, but are still happy to buy stock of market leaders in sectors with big growth potential like clean energy and e-commerce. By comparison, new share sales from sectors like real estate and traditional energy could get an investor cold shoulder due to their less rosy prospects over the near to mid-term.
Let’s begin with CGN, which has raised $3.2 billion after pricing its IPO shares at HK$2.78 (36 cents), representing the very top a previous range of HK$2.43 to HK$2.78. (English article) Even at the high end of its range, CGN still is valued at a relative discount compared to its alternative energy global peers, based on estimates for this year’s earnings.
But the company has forecast its profit will grow at least 30 percent this year, and investors are probably expecting even stronger growth in the years ahead as China builds up its new energy sector to clean up the country’s polluted air. CGN’s shares are officially set to debut next Wednesday, and I expect the shares will post a healthy gain of perhaps 10-15 percent on their first day. If that happens and the company’s underwriters exercise an overallotment option, CGN could ultimately raise up to $3.6 billion in the offering.
Next let’s look at JD.com, China’s second largest e-commerce company behind sector leader Alibaba (NYSE: BABA), which has just raised more than $600 million in its secondary offering. The company previously raised around $1.8 billion in its May IPO, making it the second biggest new listing this year by a Chinese Internet firm only behind the record-setting $25 billion raised in September by Alibaba (NYSE: BABA), JD’s main rival.
The size of this secondary offering means JD has now raised more than $2.4 billion, accounting for about 7 percent of its current market value of $33.5 billion. Of the $619 million it raised in this new offer, about a quarter was purchased by Internet titan Tencent (HKEx: 700), which is already one of JD’s strategic stakeholders. (company announcement) Other existing shareholders purchased another $50 million of the shares, meaning about $400 million of the shares in this offer were purchased by new buyers.
In terms of pricing, the follow-on shares sold for $23.80. That level was well above their price just 2 days ago, when the American Depositary Shares (ADSs) closed at $21.97. As a result of the strong pricing, JD shares have rallied 12 percent over the last 2 trading days. At the current levels, the stock is now nearly 30 percent ahead of its IPO price, though it’s also worth noting that the shares traded as high as $32 back in August at the height of an investor frenzy for China Internet stocks.
In this particular case, the 2-day surge in JD stock seems directly related to the strong pricing of the secondary offering and is probably being fueled by short-term traders looking for some quick profits before the end of the year. I’ve previously predicted the stock is likely to fall back to its IPO levels in the first half of next year as more short-term investors pull out and look for the next big thing, following this banner year for new Chinese Internet listings.