Bottom line: Yum China's (NYSE:YUMC) new stock will post moderate gains of 3-6 percent when trading begins on November 1, while Merchants Securities' IPO shares will price in the middle of their range and debut flat to up slightly.
IPOs are heating up as we head into the fourth quarter of 2016 and companies race to complete offerings before the traditionally slow period between Christmas and Chinese New Year. The last week alone has seen progress on what could be the world's two biggest offerings this year, being made by Postal Savings Bank of China and P2P lender Lufax (previous post). Now two more mega listings are in the headlines, as brokerage Merchants Securities prepares for an IPO in Hong Kong and KFC parent Yum (NYSE:YUM) gets set to spin off and separately list its China unit in New York.
Both deals should be quite large, with Merchants Securities, which is already listed in Shanghai, expected to raise more than HK$10 billion ($1.3 billion). Meantime, everyone will be watching to see where the newly listed Yum China gets valued when trading begins on November 1. The company has previously said it believes it should be worth around $10 billion, but we'll have to see if the broader market agrees with that assessment.
Let's begin with a closer look at Yum, which announced its board has formally approved a spin-off for its China unit after originally putting forth the plan last year (company announcement). Yum says the spin-off will reach formal completion on October 31, and trading in the new company will begin the next day.
The rest of the announcement is mostly small details, including the fact that each share of the current Yum will receive an additional single share in Yum China. The only other news is that the parent Yum said it also will increase its dividend by 11 percent from the previous quarter. Presumably, it will do that using some of the money it gained when it raised $460 million last month by selling a stake in the Chinese unit to two strategic investors.
There's not much more to say about this latest development since it's been widely discussed for a while and comes as rival McDonald's (NYSE: MCD) also gets set to sell its China stores to a strategic partner. As to the new listing, I expect it will probably do quite well if its financials look relatively sound. Yum in China is already on an uptick following a major overhaul of its operations over the last two years and the positive momentum should continue for at least the next couple of years.
Pony Ma Invests in Merchants
Next there's Merchants Securities, which has set a price range of HK$11.54 to HK$12.78, which could raise a maximum of HK$11.4 billion if the 891 million shares it issues price at the top of their range. The reports say company officials are on a road show this week that will take them through London, New York and Singapore, and that final pricing and a sale of the shares will take place on September 27, which happens is today.
This particular deal has 11 cornerstone investors, including an investment vehicle linked to Pony Ma, founder of Internet giant Tencent (OTCPK:TCEHY). That particular investment is probably related to the fact that both Tencent and Merchants Securities are based in the southern boomtown of Shenzhen. A brokerage executive emphasized that Ma's investment is a personal one, hinting there're no plans for broader collaboration with Tencent.
As to the Merchants IPO, I expect it will price in the middle of its range and probably post a slight gain or trade flat in its debut. Mainland brokerages were a hot item a couple of years ago when China's stock market was booming, but have lost much of their luster since then after two stock market crashes that have caused trading volumes to drop sharply.