Midea Group has started pre-marketing a Hong Kong float of at least US$3bn, aiming to become the first listing in the city to raise more than US$1bn in two years.
The Shenzhen-listed home appliance giant plans to open books for the deal as early as Monday and wrap up the transaction this month, which could hit US$4bn if a greenshoe is fully exercised.
ECM bankers are closely watching the offering, which is set to be the largest listing in Hong Kong this year. The city has not hosted an IPO bigger than US$1bn since Chinese electric vehicle battery maker CALB raised HK$10.1bn (US$1.3bn) in October 2022.
Chinese fruit tea chain Sichuan BaiCha BaiDao Industrial in April raised HK$2.59bn from Hong Kong’s largest IPO so far this year and the stock has halved in value since.
Bankers and investors generally believe Midea is the right candidate to go for size as it offers solid fundamentals and steady growth, and is a beneficiary of a Chinese government push to promote the replacement of older consumer goods.
However, tepid sentiment for Hong Kong IPOs and worries over China’s weakening consumption have prompted investors to ask for a big discount.
Bigger discount
“I’m keen to look at the deal but only if it comes with a reasonable discount [to Shenzhen-listed A-shares], say like something around 20%,” said a Hong Kong-based fund manager who has not participated in any Hong Kong IPO so far this year.
The H-shares of smaller rival Haier Smart Home, another Chinese home appliance company, were trading at a 12.7% discount to its Shanghai-listed A-shares on Thursday.
Midea, which sees Haier as a key valuation reference, is considering conceding a discount of more than 20% to its A-shares, according to people with knowledge of the matter.
“The company has been in talks with potential cornerstone investors and the message is clear – they want a bigger discount to factor in the risk,” said one of the people.
Cornerstone investors including global long-only funds, hedge funds and private equity firms are expected to take up around US$1bn of the deal.
Shanghai-listed China Tourism Group Duty Free raised HK$18.4bn from a Hong Kong listing in August 2022 that was priced at a 27.5% discount to its A-shares.
Midea's shares are up 17% this year, while the CSI 300 Index has dropped 5.2%. They closed at Rmb63.59 on Thursday for a market capitalisation of Rmb457bn (US$64.2bn).
Midea trades at a 2024 forecast P/E of around 11.5x, compared to around 11.4x for Haier and 7x for Gree Electric Appliances.
Arun George, an analyst at Global Equity Research who publishes on research portal Smartkarma, said Midea deserves a premium multiple to peers given the sound health of its business, with accelerating growth, rising margins and strong cash generation.
Resilient growth
Midea produces a wide range of home appliances including air conditioners, refrigerators, washing machines and kitchen appliances. It also sells commercial and industrial equipment such as compressors and motors, commercial air conditioners and industrial robots.
Its revenue in the first half of this year was Rmb217bn, up 10.3% from a year earlier. It posted a profit of Rmb20.8bn, up 14.1%.
Analysts at CCB International said in a research report that first-half sales were driven by exports, business expansion and growing brand recognition overseas.
The bank believes the Chinese government's current trade-in policy, which offers subsidies and discounts to households when they replace home appliances, is bound to boost demand for Midea's products in the second half. It forecasts an increase of 12.6% of the company's profit this year, to Rmb38bn.
Bank of America and CICC are the sponsors.