新股配售认购　　2006年10月

Synergy Capital Book Building Guide
(Equity Research Newsletter)

What is Book Building?

Companies may raise capital in the Hong Kong Stock Exchange by way of Initial Public Offering (IPO), rights issuing or private placement. An IPO is the selling of securities to the public in the primary market. It can be made through the fixed price method, book building method or a combination of both. The following is the difference between shares offered through book building and offer of shares through normal public issue: Book Building is basically a capital issuance process used in IPO which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both institutional and retail investors.
Features
Fixed Price process
Book Building process
Pricing Price at which the securities are offered/allotted is known in advance to the investor. Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known.
Demand Demand for the securities offered is known only after the closure of the issue Demand for the securities offered can be known everyday as the book is built.
Payment Payment if made at the time of subscription wherein refund is given after allocation. Payment only after allocation.

Objective for the Process

The aim of the book building process in an IPO is to price the issue as high as possible but it should not be so high that the investor loses interest. On the lower side the issue price should not be lower than what the investor is willing to pay. Equally important is providing a room for further appreciation in the issue price to ensure a good after market performance.

Let's understand how book building works so that we don't lose out on a good investment opportunity in Hong Kong IPO market. The book building process is undertaken to determine investor appetite for a share at a particular price. It is undertaken before making a public offer and it helps determine the issue price and the number of shares to be issued.

The Book Building Process

Step 1: The Issuer nominates a lead merchant banker as a 'book runner'

At this stage, the issuer nominates a lead investment banker to the issue as book runner and the book runner's name will be mentioned in the preliminary prospectus. The book runner is a very important intermediary in the book building process. The lead investment bank shall act as the lead book runner and the other eligible investment bank(s) shall be termed as co-book runner(s).

The book runner circulates the copy of the preliminary prospectus to the institutional buyers who are eligible for firm allotment and to the intermediaries eligible to act as underwriters inviting offer for subscribing to the securities. The preliminary prospectus circulated indicates the price range within which the securities are being offered for subscription. The issue of shares through the book-building route is indicated in the prospectus. Of the shares to be issued through the book building route, the prospectus will indicate the quantum of shares earmarked for the institutional investor and the amount for the public mentioned as 'Public Offering'. The issuer simultaneously advertises the same price range for the general pubic to solicit orders and subscriptions.

Once the IPO is ready to launch, the market sounding process begins with consultations between issuer, the fund managers and the institutional investors. These talks are held to determine what the investors are willing to pay. The company approaches these big investors during road shows held prior to the issue. The above process is used to derive a price range with a median point at which the demand for the company's stock is maximized.

Step 2: Deciding the price range and the appointment of syndicate members

The issuer, in tandem with the lead manager and the book runner, then fixes a price range for the issue. The investor is informed of the price range and he then bids at a price he thinks appropriate. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding'. Once the company gets various bids from the investor, it decides the final price at which it is willing to issue the stock. Since the company has already decided the quantum of funds it wants to raise it finalizes the number of shares it will now issue at the price fixed.

Step 3: The bids from the general public are collected through the syndicate members.

The institutions' bidding for the issue are collected by the syndicate members and also the book runner. Normally the bidding has the follow characteristics:

  • A Book should remain open for a minimum of 3 days.
  • Bids cannot be entered less than the floor price.
  • Bids can be revised by the bidder before the issue closes.
  • On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include
    1. Price Aggression
    2. Investor quality
    3. Earliness of bids, etc.

Step 4: book building

The book runner, on receipt of the offers, maintains a record of the names and number of shares ordered and the price at which the institutional buyer or underwriter is willing to subscribe to securities under the placement portion. After the bidding process is over, the issue price has to be fixed. Based on the bids received, the book runner and the issuer decide the issue price. Now, a fixed price tag has been attached to the shares.

On determination of the price, what has to be fixed is the number of securities to be offered. This can be finalized by dividing the issue size by the share price, which has now been fixed. All bidders who have quoted above the cut-off price (the price fixed by the company) are entitled for allotment. The issue price for the placement portion and offer to the public shall be the same.

Step 5: The final step

One day prior to the opening of the issue to the public, the book runner collects from the institutional buyers and the underwriters, application forms along with the application monies to the extent of the securities proposed to be allotted to them/subscribed by them.

In case of under-subscription in the net offer to the public, the spillover to the extent of under subscription shall be permitted from the placement portion to the net offer to the public portion subject to the condition that preference shall be given to the individual investors. In case of under subscription in the placement portion spillover shall be permitted from the net offer to the public to the placement portion.

How the bidding is done

The bidding period is kept open for at least five working days. The advertisement announcing the bidding contains the date of the opening of the offer and the closing date. The issue document contains the name of syndicate members who are entitled to receive the bids. Even the offer document contains the conditions of accepting the bids and the procedure of bidding. The bidding centers are electronically connected to maintain transparency and also eliminate the time lag between making and receiving of the bid.

Individual and institutional investors have to place their bids only through the 'syndicate members' who have the right to vet the bids. The bids can be revised innumerable number of times before the issue closes. The offer/issue price is then determined after the bid closing (book closing) date based on certain evaluation criteria.

HannStar Case study

Let's take a recent IPO case done by our strategic partner as an example, the HannStar Board International Holdings Limited. The company came out with a public issue of HK$575 million. The price range of the shares offered was HKD 1.37 - 1.77. The issue comprised the institutional placement portion of 90% and public offering portion of 10% out of the HKD 575 million fund raising. Not less than 57.5 million was reserved for individual investors and HKD 517.5 million for institutional investors. The bidding for the book building portion opened on 11th September 2006 and closed on 22nd September 2006. The price range for the bidding was between HKD 1.37 to HKD 1.77. Both individual investors and institutional investors actively participated in the bidding and the institutional portion of the issuing was oversubscribed 10 times and the public offering portion of the issuing was oversubscribed 312 times. After the bidding was over, the book runner TSC Capital and Polaris Securities fixed the issue price at the top range HKD 1.77.

It should be amply clear now how the book building process works. The next time any company comes out with a public issue with a book building portion, you know what to do.