Busy traffic runs past the headquarters of Sinopharm Group in Beijing on Friday. Bloomberg News

HONG KONG: Sinopharm Group Co, the country's largest drug distributor, may raise as much as HK$8.73 billion ($1.13 billion) from a Hong Kong initial public offering, said two sources familiar with the sale.

The company plans to sell 545.7 million new shares, a 25 percent stake, at HK$12.25 to HK$16 each, said the sources, who declined to be identified before an announcement.

The top of the range values Sinopharm at 25 times next year's earnings, almost double the ratio for McKesson Corp, the largest US drug seller, according to data compiled by Bloomberg. Sinopharm is the first to price its shares of six companies seeking to raise a combined $5 billion in what may be the busiest month for Hong Kong IPOs since November 2007.

"There's certainly an element of market timing to these listings," said Ben Collett, Hong Kong-based head of cash equities at Tradition (Asia) Ltd. "These new issues are a bold statement of confidence in the market, and likely to be treated as such by investors looking for a catalyst."

Officials at Sinopharm couldn't be reached on the number listed on its website. China International Capital Corp, which is managing the sale along with Morgan Stanley and UBS AG, didn't immediately respond to e-mails seeking comment sent after business hours. Morgan Stanley spokeswoman Noel Cheung and UBS spokesman Chris Cockerill declined to comment.

The top end of the range values the Shanghai-based company at HK$34.9 billion as estimated by banks involved in the sale. Sinopharm may expand the number of shares on offer by 15 percent to meet additional demand for the stock.

Sinopharm's IPO has attracted nine cornerstone investors, including the Government of Singapore Investment Corp, Och-Ziff Capital Management Group and China Life Asset Management Co, which have been guaranteed $195 million of shares in exchange for a promise to hold on to them for a few months.

The nation's only central government-controlled drug seller is raising capital to expand, improve its distribution and retail networks, buy foreign pharmaceutical products, upgrade its logistics systems and better its information technology and e-commerce platform, according to a preliminary share sale document sent to investors August 31.

The domestic pharmaceutical market is expected to grow 17 percent annually in the next five years, on the back of an aging population, rising household income, government investment in health care and industry reforms, according to a Morgan Stanley report sent to fund managers dated August 28.

Sinopharm runs the largest drug distribution network on the mainland with a nearly 11 percent market share in 2008 and a 6 percentage point lead over its closest competitor, said the report.

Its ownership by the central government has allowed it to win government tenders for drug procurement, prevail over competitors in mergers and acquisitions, and obtain more exclusive rights to distribute premium imported drugs and anesthesia products, the report said.

Sinopharm buys medicine from 3,300 drug makers, including 30 of the top 50 global players and 95 of the 100 largest domestic producers, the report noted. It generated 586 million yuan ($86 million) of profit on 38.2 billion yuan of sales last year.

The IPO is scheduled to be priced September 16. The stock will start trading September 23.

Bloomberg News

(HK Edition 09/05/2009 page5)