initial public offerings (IPOs) trading on American exchanges

Thursday, July 31, 2008

U.S. Debut for Chinese Education IPO

China Distance Education (symbol: DL) raises a disappointing $61.25 million and becomes only the third Chinese company to complete a US IPO this year

China Distance Education Holdings (CDEL) has completed the third initial public offering in the US by a Chinese company this year, but only after it lowered its original price range by 22% at the bottom end on the last day of marketing. The final price was then set at the very bottom of the new range, allowing for a base deal size of $61.25 million.

The provider of online education and test preparation courses had initially hoped to raise up to $97.25 million, or 59% more than it was finally able to pocket. Deeming from the first trading session on the New York Stock Exchange last night though, some investors think the fair value of CDEL should be a bit lower still as the share price was pushed down another 5.3% to $6.63 a share, having traded as low as $6.25 at one point.

While the education sector is generally viewed as having good future prospects, the deal was up against a widespread lack of interest in primary market transactions which didn't really change even though the market trended upwards during the two-week marketing period—as did two of its closest comparables. One source notes that there is still "a significant disconnect" between the secondary market and investor appetite for stock in the primary market. And it clearly didn't help that GT Solar, a manufacturer of equipment used to make photovoltaic wafers, fell 11.6% on its trading debut last Thursday and is currently trading close to 25% below its IPO price.

However, sources say CDEL's initial price range may also have been a bit too ambitious in the current market as it valued the newcomer at a premium to the valuation at which ATA Inc came to market six months ago, even though CDEL is at a similar, or even earlier, stage of growth than ATA and has yet to prove that it can deliver on its promises. ATA is also based in China and caters to the same market as CDEL but, instead of pre-exam preparation services, it provides online exams—a business that observers describe as less scalable.

CDEL focuses primarily on professionals and the skills, licenses and certificates that they need to pursue a career in China within accounting, law, healthcare, construction engineering, and information technology among other industries. The Beijing-based company also offers online preparation courses for higher education diplomas and degrees, and for academic and entrance exams at the secondary school and college level; and foreign language courses. The business is feeding off a government push to regulate professional licenses in various industries in order to lift the overall skill levels.

According to Chinese market research firm CCID Consulting, the professional education and test preparation market in China grew to Rmb75.0 billion in ($10.7 billion) in 2007 from Rmb45.2 billion in 2005 and CCID projects that it will more than double to $155 billion by 2010.

After lowering the initial $9 to $11 price range to $7 to $8, CDEL fixed its IPO price at $7, which translates into a valuation of about 15 times its earnings to September 2009 on a post share-based compensation basis. On a pre-share-based compensation basis, the price-to-earnings multiple is about 15 times which, according to a source, compares with P/E multiples of 31.9 and 20.5 for New Oriental Education and Technology Group and ATA respectively, when adjusted to refer to the same 12-month period to September 2009. New Oriental, which also provides test preparation services and teaches English to Chinese professionals, has a fiscal year ending in May, while ATA's fiscal year ends in March, making its unadjusted numbers not quite comparable.

New Oriental's share price gained 8.8% during the marketing and bookbuilding of CDEL and ATA added 25%.

CDEL sold 24.7% of its share capital in the form on 8.75 million new ADS, which each accounts for four common shares. A greenshoe could increase the size of the offering by another 15% to $70.4 million. Citi and Merrill Lynch were joint bookrunners.