HK IPO subscription: Hengrui Pharmaceuticals IPO analysis and subscription plan

Jiangsu Hengrui Pharmaceuticals Co., Ltd. (Hengrui Pharma) is a globally leading innovative pharmaceutical company rooted in China. The company focuses on innovative treatment solutions and is committed to addressing significant unmet medical needs worldwide. Since its listing on the Shanghai Stock Exchange in 2000, Hengrui Pharma has built a vast portfolio of differentiated innovative drugs through continuous R&D investment and innovation. The company has 19 marketed new molecular entity (NME) drugs and over 90 NME candidates in clinical or later-stage development.

Hengrui Pharma holds significant advantages in multiple therapeutic areas, including oncology, metabolic and cardiovascular diseases, immunology and respiratory diseases, and neuroscience. Through a multi-pronged R&D approach and advanced technology platforms, the company develops drugs with diverse characteristics, covering small molecules, proteolysis-targeting chimeras (PROTACs), peptides, monoclonal antibodies (mAbs), bispecific antibodies (BsAbs), multispecific antibodies, antibody-drug conjugates (ADCs), radioligand therapies (RLTs), and oligonucleotides.

The company has established robust end-to-end clinical development capabilities, with an in-house clinical development team covering approximately 5,000 clinical investigators and conducting around 400 clinical trials. Hengrui Pharma also possesses a globally compliant production system, ensuring superior product quality, stable supply, and cost efficiency. Additionally, the company has strong commercialization capabilities, with a self-built sales and marketing team of about 9,000 people, covering over 22,000 hospitals and more than 200,000 offline retail pharmacies across more than 30 provincial-level regions in China.

Use of Proceeds:

Hengrui Pharma plans to allocate the net proceeds from the global offering as follows:

R&D Plans: Approximately 75% of the proceeds (about HKD 7,093.4 million) will be used for the company's R&D initiatives. This includes advancing the development of innovative drugs, clinical trials, and further optimization of technology platforms. The company will continue to increase R&D investment in core therapeutic areas such as oncology, metabolic and cardiovascular diseases, immunology and respiratory diseases, and neuroscience to maintain its leading position.

Construction of Production and R&D Facilities: Approximately 15% of the proceeds (about HKD 1,418.7 million) will be used to build new production and R&D facilities in China and overseas, as well as to expand or upgrade existing facilities. This will enhance production capacity, support the commercialization of new drugs, and strengthen the company's competitiveness in global markets.

Working Capital and General Corporate Purposes: The remaining 10% of the proceeds (about HKD 945.8 million) will be allocated for working capital and general corporate purposes, including daily operations, strategic investments, and potential acquisitions to expand the company's business footprint and market position.

IPO Details and Lottery Rate:

The company is offering 224.5198 million shares globally, with 200 shares per lot. As of the time of writing, the oversubscription rate is 49.93x. Based on the current margin financing multiple, the clawback rate is 21.5%, with an estimated 50,000–90,000 participants. The lottery rate for one lot is around 60%, and applying for 10 lots guarantees one allocation.

Assuming Hengrui Pharma adopts an average allocation system, the lottery rate for one lot would be around 15%, and applying for 30 lots guarantees one allocation.

History and Cornerstone Investors:

The company was listed on the Shanghai Stock Exchange in October 2000 and is currently the top-valued innovative pharmaceutical company in mainland China. This Hong Kong listing completes its A/H dual-listing structure. The current A/H premium ranges from 32.48% to 40.79%, with an H/A discount of 24.52% to 28.97%. Below are key milestones in its development:

For this offering, the company has secured seven cornerstone investors, who have subscribed for USD 533 million (approximately HKD 4.165 billion). At the upper price limit, cornerstone investors account for 41.77% of the offering; at the mid-point, 43.04%; and at the lower limit, 44.39%. The lock-up period is six months.

Sponsors:

The offering is jointly sponsored by Morgan Stanley, Citigroup Global Markets, and Huatai Financial Holdings, with Morgan Stanley acting as the stabilizing agent. Historically, Morgan Stanley-sponsored and stabilized offerings have performed well, especially when the company's fundamentals are strong.

Financial Highlights:

Revenue:2022 revenue was RMB 21.275 billion, 2023 revenue was RMB 22.820 billion, and 2024 revenue was RMB 27.985 billion.

Gross Profit:2022 gross profit was RMB 17.789 billion, 2023 gross profit was RMB 19.295 billion, and 2024 gross profit was RMB 24.136 billion;

Net Profit:2022 net profit was RMB 3.815 billion, 2023 net profit was RMB 4.278 billion, and 2024 net profit was RMB 6.337 billion;

Comprehensive Review:

Hengrui Pharma is the absolute leader in China's innovative drug sector and the highest-valued pharmaceutical company in the A-share market. The company's main therapeutic areas include: 1) oncology; 2) metabolic and cardiovascular diseases; 3) immunology and respiratory diseases; and 4) neuroscience.

The proportion of innovative drug sales in total revenue has been increasing, rising from 38.1% in 2022 to 46.3% in 2024, while generic drug sales decreased from 60.3% to 42% over the same period. The company's net profit margin also improved from 17.9% in 2022 to 22.6% in 2024. This blue-chip quality has been validated in the A-share market, and the company's revenue structure is shifting toward innovative drugs, with tangible improvements in financial metrics.

For dual-listed A/H shares, the upside is often limited by A-share performance. However, when analyzing the A/H premium, I recalled the 2020 IPO of Tigermed, a CRO concept stock dual-listed in A/H shares, which gained 19.30% in the gray market and 13.30% on its debut. At the time, I participated in the subscription and was allocated three lots. While I can't find the original article, I still have the A/H premium table for CRO concept stocks from that period.

Back then, the A/H premium for CRO stocks wasn't as wide as it is now. The current gap is staggering, making A-share investors seem relatively fortunate (finding solace in hardship). Here’s the current premium situation for innovative drug CRM concept stocks:

The table shows that WuXi AppTec's premium has remained stable over the past five years, while other peers have seen widening A/H valuation gaps. This indirectly reflects the preferential treatment for industry leaders. Hengrui Pharma is undoubtedly the domestic leader, and while its global recognition lags behind WuXi AppTec, it holds an advantage over competitors like RemeGen. As a benchmark in China's pharmaceutical industry, I believe a 12–18% premium is acceptable. The next step depends on A-share performance. If it stabilizes or rises further, coupled with positive sentiment in the Hong Kong IPO market, a theoretical gain of 7–15% is plausible.

As for CATL, why did its H-share listing perform so well despite being priced close to its A-share valuation? I attribute this to CATL's global standing as an industry benchmark. Simply put, foreign investors are more willing to allocate to CATL in Hong Kong due to fewer restrictions compared to A-shares. Given that the Hong Kong exchange is part of the international market, it’s much more convenient for global capital to invest in CATL there. Thus, a positive H/A premium for CATL isn’t surprising, given the abundance of international liquidity.

While Hengrui Pharma is a domestic leader, its global stature pales in comparison to international pharmaceutical giants. Thus, the A/H premium impact will be more pronounced for Hengrui. Overall, as China's top pharmaceutical company, participating in the subscription is reasonable.

Subscription Plan:

I will subscribe.

$Hengrui Pharma(600276.SH)

Disclaimer:Investing involves risks, and participation requires caution. The mentioned securities are for personal record-keeping only and do not constitute investment advice. I am not responsible for any losses incurred. If this article is helpful, please like, share, and recommend it to friends in need. Thank you!