Bad day in New Jersey. Yesterday was the first super-hot day of the late spring, with temperatures approaching 100 degrees Fahrenheit. Creaking power infrastructure reacted in the way we’re unfortunately becoming accustomed to. It collapsed. No power for most of our neighbors, no internet or cable TV for us. Hence the late post.
According to Bloomberg, the plug was pulled on the Graff Diamonds offering less than two days before the stock was supposed to debut.
I can’t say I was shocked, for several reasons:
–Hong Kong has been pummelled especially badly by selling emanating out of the EU, where another flight to safety by equity investors is in full flower. It looks almost like last summer. (Where did they get all the stock?)
–Chow Tai Fook Jewellery (HK: 1929) came public late last year and is now trading at about 2/3rds of the IPO price. True, 1929 sells mainly chuk kam pure gold jewelry and knickknacks, not diamonds. But the market is the same–China.
–TIF, whose main problems appear to me to be in the US, nevertheless also reported a deceleration in its China business last quarter.
–I suspect that retail investors in Hong Kong–always important in that market–were especially badly burned by the Facebook IPO. IF US retail investors got 5x-10x what they expected, Hong Kongers could have gotten double that size. Hong Kong is a market of veteran stock market participants, so they’ll shrug off their bad treatment by underwriters quickly. But if I’m correct, they’re still licking their wounds.
–I haven’t tried to locate a copy of the Graff Diamonds prospectus. My experience is that in Hong Kong these documents weigh a ton, but don’t contain anything like that amount of information. Besides, they’re not supposed to be available in the US until after the offering. Media reports do bring up two potentially worrying issues, however.
Apparently, a mere 20 customers make up 50% of revenues.
A large chunk of the IPO proceeds were said to be earmarked for buying diamond inventory from the company’s founding family. I’d want to know how this inventory is being valued–and how many months’ (years?) sales this represents. I’d also want to know how the acquisition of the gigantic gems Graff is famous for will proceed from now on. Does the Graff family act as exclusive agent for the company? …is the family paid a commission for acquisition?
a paucity of demand
When the IPO was pulled, the underwriters had orders for only half the shares intended to be offered by the company. In a healthy offering the books would be, say, 5x covered. A “hot” offering might have books 10x covered. In Hong Kong, which operates under different rules than the US, 100x isn’t unknown.
In the current economic environment, Graff Diamonds was always going to be a tough sell, especially with the family wanting 25x earnings for its shares. I think FB did much more to suck the life out of this offering than most brokers would be willing to admit, however.