Healthy demand

Which two IPOs locked up $19 billion of funds in Hong Kong?


Kangji Medical’s headquarters

The peg of the Hong Kong dollar to the greenback has been around since 1983. Bears have loudly predicted it will come under strain in the next 18 months, citing the decoupling of the world’s two largest economies, the US and China. But despite bearish bets made by short sellers, the city’s currency has only been strengthening lately. Last week it twice hit the strong end of its narrow trading band of HK$7.75-7.85. One of the reasons: a string of jumbo share sales that are sucking in cash and causing liquidity in the banking system to tighten.

One of the hottest deals was the listing of Kangji Medical, China’s largest homegrown provider of minimally invasive surgical instruments and accessories. Planning to raise about HK$3.1 billion ($400 million), the Hangzhou-based company saw its retail tranche oversubscribed 332 times, attracting orders worth HK$102 billion through margin financing.

In comparison, the secondary listings of internet majors and NetEase lured HK$77 billion and HK$81 billion to their retail book respectively.

Compared to a lot of the recent healthcare listings in Hong Kong, Kangji Medical stands out as a profitable entity. Selling its equipment to 3,400 hospitals across China through domestic distributors, the company reported Rmb504 million in revenue last year, boasting a compound annual growth rate of 43% since 2017. On the back of a widening gross profit margin (at 84% in 2019), its bottom line has more than doubled in the two years to Rmb327 million.

It helps that the transaction had the backing of a number of marquee asset managers – indeed 41% of the shares on offer were purchased by seven cornerstone investors, namely Fidelity, BlackRock, Lake Bleu, Hillhouse Capital, Cormorant, OrbiMed and Oaktree.

Kangji Medical believes it will piggyback on the growing demand for minimally invasive surgery in China as such techniques have not been prevalent in the country previously (laparoscopy — surgery performed through one or more small incisions, using small tubes, tiny cameras and other instruments — was one of the first types of minimally invasive surgeries).

According to China Insights Industry Consultancy, a research firm, the number of minimally invasive surgeries performed per million people in China was 8,514 in 2019 versus 16,877 in the US. For Kangji, that represents a Rmb40.8 billion opportunity by 2024, hence the need to raise funds for expanding production capacity.

Another IPO that grabbed tremendous attention from Hong Kong investors was Hygeia Healthcare, China’s largest oncology healthcare group by revenue. Backed by private equity funds including Warburg Pincus, Boyu, Citic Capital as well as biotech company WuXi AppTec, the Shanghai-based firm saw its HK$2.2 billion share sale attract retail orders of HK$50.4 billion, an oversubscription of 608 times.

Hygeia made Rmb1.1 billion in revenue last year, mostly from running oncology-focused hospitals in non-tier-one cities.

Investor enthusiasm for the two companies reflects the strong performance of biotech and healthcare stocks on the city’s stock exchange. Guangdong-based antibody drug maker Akeso, for instance, has seen its shares rise 48% since its Hong Kong IPO in late April, even though it has yet to turn a profit. Beijing-based cancer drug developer InnoCare Pharma likewise recorded a 60% jump since listing in March.

Hong Kong’s IPO market has been inundated by healthcare companies since the easing of its listing rules in 2018. In the first half of 2019, the sector accounted for 71% of the total funds raised from IPOs and 42% of the deal volume, data from Deloitte shows.

This year, however, the sector’s proportion of funds raised dropped to just 21% as a lot of the healthcare deals were dwarfed by the mega offerings from Chinese internet and tech heavyweights seeking a secondary listing in Hong Kong.

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