By Jing Song
HONG KONG, April 15 (Reuters) - A lukewarm response from retail buyers to Hong Kong's first yuan-denominated initial public offering suggests there is some way to go before the city fully embraces shares denominated in the Chinese currency, International Financing Review (IFR) said on Friday.
Hui Xian REIT, the first company to sell yuan-denominated shares in Hong Kong, has attracted strong demand from institutional investors for its up to 11.16 billion yuan ($1.7 billion) IPO.
However, orders from the retail sector are falling far short of expectations, said IFR, a Thomson Reuters publication.
"The market response to the Hui Xian REIT has been a bit slow and the retail portion has not been fully subscribed yet," Alvin Cheung, associate director at Prudential Brokerage, was quoted as saying on Friday.
The retail offering will close on Tuesday.
As of April 14 - four days into bookbuilding - the public offering tranche was still not fully covered, based on margin financing and estimated orders, IFR said.
Hong Kong's main brokerages reported margin financing of about 602 million yuan, accounting for only 27 percent of the retail tranche, IFR said. Hui Xian REIT has set aside 20 percent of its IPO, or 2.09-2.23 billion yuan, for retail investors.
Prudential Brokerage has only lent out HK$30 million ($3.9 million) of margin loans for the IPO so far, well below the HK$1.5-10 billion it typically lends on other Hong Kong dollar-denominated IPOs.
Subscriptions in cash were taking time to come through, although about 100,000 copies of the prospectus and 400,000 white forms had been handed out, IFR said.
"It seems retail investors prefer to buy in cash than through margin financing. The reason may be that they are afraid to get more shares in hand than expected, as the chances of that are greater than in regular IPOs," said a Hong Kong-based fund manager. "What's more, the cost in margin financing is also a consideration."
Margin financing on Hui Xian's IPO is more expensive than usual, with brokers charging annualised interest rates of about 2 percent, compared with the usual less than 1 percent to compensate for the additional cost of swapping Hong Kong dollars to yuan, IFR said.
Some brokerages were charging as much as 2.8 percent for margin financing against 1-2 percent for Hong Kong dollar issues, according to Cheung at Prudential, which charges 1.8 percent, the report said.
INTERNATIONAL INTEREST
The institutional portion of the offering, however, was covered by the second day, and the company would decide on Monday morning whether to close the book ahead of time, it said.
There was very little price sensitivity and most orders were at the strike price. A huge number of orders came from investors in London, even before the roadshow reaches the city this Monday (April 18), IFR said.
The yuan-denominated REIT has even drawn the attention of hedge funds, who are normally less interested in products where liquidity may be limited, it said.
As the only yuan-denominated shares to trade in Hong Kong, analysts are concerned that secondary trading will be thin. Local media reported that two of the world's largest hedge funds, Och-Ziff and Fortress, had subscribed to Hui Xian shares.
People involved in the deal declined to confirm details, IFR said.
"There is indeed a lot of demand from hedge funds," a banker close to the deal told IFR. "They joined the party not only because there is a possibility to make money in the aftermarket, but also because Hui Xian is the only big renminbi (yuan) instrument in the market and it guarantees stable profits. If you are bullish on the renminbi, why not buy it?"
Hui Xian, brought to market by Hong Kong billionaire Li Ka-Shing's Cheung Kong (Holdings) Ltd , is selling 2 billion units at a guidance range of 5.24-5.58 yuan, representing yields of 4.07?4.33 percent for 2011 and 4.44?4.73 percent for 2012, based on joint bookrunners' consensus estimates, or a yield of 4.00?4.26 percent for 2011, based on the company's own profit forecast.
That is low for a REIT, but Hui Xian was betting that the expected renminbi appreciation of more than 3 percent this year would help lure investors, IFR said.
Hui Xian controls the Oriental Plaza complex in central Beijing, which includes a shopping centre, serviced apartments, a luxury hotel and eight office buildings.
The shares will be priced on April 19 and are set to start trading on April 29. BOC International, Citic Securities and HSBC Holdings Plc are leading the transaction. (Additional reporting by Alison Leung; Editing by Chris Lewis)