What makes a Hong Kong IPO different; upcoming issues from WYNN and LVS

Generic IPO stuff

Any initial public offering has certain general characteristics:  an offering document, a selling syndicate, an underwriting group (which may, or may not, take ownership of the deal from the issuer),…

Underwriters and potential buyers, usually institutions, do a ritual dance around the topic of making firm indications about how many shares they want to buy.  The underwriters want to figure out what the real demand for the stock is, but they also want to create “buzz” by being able to say early in the offering period that the books are covered (that is, they have firm bids for all the shares being offered) by 3x, 5x or some larger number of times.

Bidders, for their part, often try to get a larger allocation of a “hot” issue by asking for many times the amount of stock they actually want.  In most markets, there’s no cost, other than possibly getting the underwriter annoyed or possibly getting stuck with a gigantic amount of unwanted stock if the IPO flops, for really inflating your order.  In Hong Kong, things are different, though.

How they do it in Hong Kong

In Hong Kong, the traditional rule of thumb is that a new issue is only successful if it goes up 30% or more from the offering price on the first day of trading.  Up less than that, it’s a failure.  Here’s why:

Hong Kong has a very high level of retail interest in IPOs.  And it has an unusual solution to the overbidding problem.  Applicants for IPO stock have to deposit enough funds with the underwriters to pay for all the stock they bid for, not just the amount they expect to be allocated.  In other words, if the IPO is “hot” and 30x oversubscribed, the bidder who wants 1,000 shares of a HK$1.00 stock will ask for 30,000 shares and make a HK$30,000 deposit.

You can put up your own money or have your broker arrange a loan.  Suppose the cost of this is 1% of the amount deposited (interest income from the deposits goes to the company being IPOed).  That amounts to 30% of the value of the stock you stand to receive.  Hence, the 30% rule.

Upcoming gaming IPOs will answer Macau questions for Americans

Two American casino companies, WYNN and LVS, are in the process of IPOing their interests in Macau through offerings in Hong Kong.  The WYNN IPO roadshow is slated to start on September 21st, with listing on October 9th.  The company is proposing to sell a 20% interest in its Macau subsidiary for what the market seems to expect will be US$ 1 billion.  The LVS offering will come later in the year.

It will be very interesting to see how they are received.  Two issues:

1.  Will one IPO get a higher valuation than the other? Both are looking for money to fund expansion in Macau.  But their overall corporate financial conditions are quite different.  LVS, an operator of convention-oriented properties, was caught by the financial crisis in the midst of simultaneous expansions in Las Vegas, Macau and Singapore.  WYNN, although it pressed ahead with completion of the Encore expansion of its Las Vegas Wynn Resort, has charted a much more conservative course.  This is doubtless because Steve Wynn, king of the high-roller market, lost control of his previous company, Mirage, during a prior downturn in the US industry.  It seems to me that LVS wants the IPO proceeds to keep the wolf from the door; WYNN wants to make sure it spends enough on maintenance and upgrades so it doesn’t take on the worn and tired look most of its competitors are beginning to sport.

2.  How will they stack up against the Pacific-based competition?  Arguably, the American companies have a more sophisticated product and experience with operations in a competitive marketplace.  The Macau government, it seems to me, wants WYNN and LVS to succeed and to act as a counterweight to the influence of the local operators.  And the less than pristine reputation of some of the other operators should make it more difficult to lure management talent away from any American gaming company.

On the other hand, the competitive situation can be sticky for everyone in a market where weaker competitors shift from trying to make money to trying to get their capital back out of an unwise investment.  And it’s never been clear to me how much of a reputational discount there is imbedded in the prices of the already-listed Hong Kong gaming stocks.

We’ll know soon!

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