A Dublin exchange, Chinese projects, a Hong Kong listing, international investment banks, Asian and US IR firms, and a global roadshow
One of the basic ideas behind the business of investor relations is to create value for a company and bring on new capital to finance opportunities. In the case of New World Development Co, a strong corporate finance idea backed by solid communications created a company worth some $1.2 bn in two short years. Working with Crdit Lyonnais Securities Asia and IR consultant Keith Statham & Associates, Hong Kong-based New World was able to go to the global market for some $400 mn.
The packaging of New World Infrastructure came at a time when global investors and bankers were less than enamoured with investments in Chinese infrastructure projects. Many had seen them stalled by lack of capital; and Chinese government limitations on returns on investment in the power sector were considered uncompetitive. The lure of India and Vietnam were distracting key players, and investors were being dragged alongside.
But New World could offer investors a structure that made sense in terms of the long-run risk-reward quotient, while covering the short-term with ongoing operating assets. With the injection of HK$6.3 bn of assets from New World Development, New World Infrastructure ranks as the HKSE's 34th largest company; and its October 1995 $300 mn offering was the biggest listing in Hong Kong since Gordon Wu's Consolidated Electric Power of Asia (Cepa).
In under two years, New World Development floated a total of $400 mn worth of long-term equity for China infrastructure projects. 'The global roadshow had to explain a complex transaction in detail to investors who were sceptical about the opportunity at hand,' says Flora Chan, a principal in Keith Statham Associates, who led the global IR programme working with Taylor Rafferty in the US and Europe. 'The key shift of New World Development assets to New World Infrastructure, and the avoidance of conflict of interest between the two in terms of future investments, had to be handled with care,' says Chan. 'In the end, investors were satisfied with the explanation and the offering was well over-subscribed.'
The IR effort had to communicate New World Development's credentials in China, and its ability to make money in an area where few have ventured. The company's China commitment goes back to the early days of economic reform when, in 1980, Dr Cheng Yu Tung, founder and chairman, arranged the first foreign joint venture investment in China. Then, as many foreigners were leaving China in the wake of the Tiananmen Square incident of 1989, New World was busy financing the Guangzhou Zhujiang Power Plant and Guangzhou Northern Ring Road with $430 mn.
'We watched everyone fleeing and figured the timing was right to invest. That impressed the central government,' says Henry Cheng, managing director of New World and son of Cheng Yu Tung. 'We purchased 50 per cent ownership of Zhujiang Power Plant and 40 per cent of the Northern Ring Road in 1989. The toll road opened in 1994 and daily travel jumped from 45,000 to 90,000 cars within 20 months. Meanwhile, the power plant is meeting its 18 per cent per annum return ratio and investors are satisfied.'
However, back in 1993 New World Development had reached an impasse regarding the financing of its operations. Senior management was against increasing debt levels; nor was there any interest in raising equity through a rights issues or share placement. 'Management felt dilution of earnings in a company listed in Hong Kong, London and New York (ADR), with a market capitalisation of over $6 bn, would hurt its share price,' explains Chan. 'Nor could New World Development list its projects on an exchange due to its limited track record.'
Management desperately needed investors to come on board and support its long-term strategy. To deal with these issues, Crdit Lyonnais Securities Asia composed the Direct Investment Vehicle for Asia. In arriving at the so-called Diva structure, New World China Investment (NWCI) was created to invest in the group's property, infrastructure and industrial projects in mainland China. Listed on the Dublin Stock Exchange with capital of $200 mn, this investment fund balanced New World Development and investor requirements.
New World Development subscribed to $100 mn of the Dublin offering, and within a month of closing NWCI was 40 per cent invested. To avoid conflicts, NWCI had the first right of refusal for New World Development investments in related areas. Such investments needed the approval of a committee made up of independent investors to ensure projects were offered to the fund at competitive prices.
Further, a put option allowed investors to exchange illiquid NWCI shares for more liquid New World Development shares. But control of projects remained with New World Development, and a fee of 15 per cent of NWCI's realised gains was offered to it in return for its management effort.
However, NWCI was a structure in transition. To provide funds for expansion and an exit for its investors, a second phase was necessary. In early 1995, with most of the $200 mn invested, Crdit Lyonnais advised New World Development that listing a part of the China operations in Hong Kong was an alternative. As Michael Dean, director and head of corporate finance at Crdit Lyonnais, notes, NWCI would be attractive to investors as a pure China infrastructure play because of its relatively stable cashflow and growth potential.
'When discussing the formula with management, we wanted to ensure investor interest was not dampened in New World Infrastructure by the inclusion of non-infrastructure assets,' recalls Dean. 'And, we were eager to include Hong Kong infrastructure interests. The proven cashflow of these projects would reduce the perception of risk.'
The New World Infrastructure deal was complicated from a corporate finance view by the necessity of conducting due diligence on twelve PRC and three Hong Kong infrastructure projects. These projects were all to be rolled into New World Infrastructure.
In addition, there were extensive legal issues to deal with, and discussions had to be conducted with regulatory bodies and joint venture partners. The deal also involved long negotiations with the HKSE and Dublin Stock Exchange, as well as the shareholders of both NWCI and New World Development itself.
Once this preliminary phase had been concluded, an underwriting team was selected. The syndicate included Merrill Lynch Hong Kong Securities as senior co-lead and HSBC Corporate Finance, Nomura International and JP Morgan Securities as co-leads. To promote the issue, New World executives, the bankers and the IR team embarked on a three week roadshow to meet 500 institutions in 18 cities. The objective was to increase the issue size and achieve the best pricing by communicating the finer points of the deal to investors.
All the hard work paid off, as the IR message scored points with foreign investors worldwide. The pricing at 28 times PE (for HK$12.75 per share versus a net asset value of HK$13.90), proved to be the highest on the HKSE for two years. In the end, the placement was oversubscribed 17 times.
Since the listing, the shares have made a gain of 15 per cent in the secondary market. Meanwhile, NWCI investors achieved a gain of over 35 per cent in under two years, compared with a fall of more than 20 per cent in the Crdit Lyonnais Securities Asia China Index over the same period.
But New World Infrastructure's pricing and premium level pale in comparison with those of Cepa, the biggest IPO in HKSE history at HK$5.9 bn and one of the most expensive with a PE of 39 times. When Cepa came to market in late 1993 - with a net asset value (NAV) of HK$9.40 compared to a listing price of HK$12.50 for a 33 per cent premium - it was oversubscribed 43 times.
But there are a number of differences between these two listings. 'First, Cepa was launched in the midst of a bull market,' says Dean. 'Currently, HKSE listings tend to trade at a discount to NAV. That is primarily due to risk on generally sizeable property assets. The higher the percentage assets in property, the higher the discount, with pure property companies having the highest discounts. This is one key reason why we moved to keep property out of the asset mix of New World Infrastructure.'
According to Ti-Sheng Young, JP Morgan equity research analyst, the quality of New World's cashflow and earnings is better than either Cepa or NYSE-listed Huaneng Power International. Earnings are forecast to grow from HK$414 mn in 1996 to HK$1.1 bn in 1999 and, if that is achieved, earnings per share will rise from HK$0.60 to HK$1.61. Some 45 per cent of the EPS forecast is based on growth from ten completed projects plus profits from three new roads around Zhaoqing and a 57km Guangzhou-Zhuhai East Expressway. The 434 km of roads and bridges - 75 per cent longer than Gordon Wu's network - account for 33 per cent earnings and 43 per cent of NAV.
'Still, earnings do not drive New World Infrastructure values at this stage,' says Young. 'Though it has a good mix of existing cash-generating businesses and new projects, initial earnings do not reflect the earnings and cash-generating potential. Furthermore, it has structured many joint ventures to repay shareholder loans and capital within five to six years. For that reason, our valuation for New World Infrastructure is based on a combination of discounted cashflow and earnings multiples.'
For his part, Cheng says that for power projects minimum return requirements are 18 per cent; for toll roads they are 25 per cent. 'We invest in areas like Guangdong, Wuhan City and Hong Kong,' he notes. 'Our strengths are clear: we have a diversified portfolio in growth regions providing recurrent cashflows complemented by a proven record of management expertise.'
No one expects New World Infrastructure to rest on its laurels, however. Further power and road deals are likely to be funded by the HK$1.5 bn in cash from the listing and supported by the strong company cashflow. Should it gear to a comfortable debt to equity ratio of 40 per cent, up from the current 10 per cent, another $300 mn in debt funding could be available.
With this kind of momentum in place other players may well use the Diva structure as a model for China, and the investor relations team will have little rest before hitting the road with another offering.