China Communications Construction sets range for downsized IPO

China Communications Construction sets range for downsized IPO
The Sutong bridge over the Yangtze river, one of CCC's landmark projects

China Communications Construction (CCC) has set the indicated price range for its planned Rmb5 billion ($791 million) Shanghai initial public offering and kicks off an accelerated two-day bookbuilding today.

The price range is set at Rmb5 to Rmb5.4 per share, which values CCC at 6.52 times to 7.04 times its 2011 earnings, the company said in a statement released late yesterday on the Shanghai Stock Exchange website.

The IPO price will be fixed on the February 16 after 74 institutional investors took part in an initial price consultation, it said. BOC International and Guotai Junan Securities are bookrunners.

CCC, which is the country's leading port and railway builder, got the green light for a Shanghai IPO from China's securities regulator last year. The company initially planned to raise Rmb20 billion through the sale of 3.5 billion shares, but later trimmed the size to just Rmb5 billion, or 1.6 billion shares. The downsized offering accounts for 9.74% of the company's enlarged capital.

Infrastructure analysts say it will be difficult for CCC to record substantial profit growth during 2012 because China's economic growth, on which the country's builders rely heavily, is likely to moderate this year. Also, the government-backed CCC, like many other state-owned enterprises (SOEs), enjoys a monopoly position and already has a huge market share. There is very little room for it to expand further.

CCC is the 12th-biggest state-owned firm in China, it states on its website. In total, there are 127 companies under the direct governance of the State-owned Assets Supervision and Administration Commission.

The company has engaged in the design and construction of many of China's flagship ports and bridges. It has a 70% market share in domestic port construction and 80% in large bridge construction. It is also a market leader in dredging.

The company plans to use the proceeds from the share sale to buy equipment and fund nine construction projects -- which will cost Rmb45 billion in total. Clearly the targeted Rmb5 billion will not be enough to meet those needs, but the company has said it will also seek other financing.

Investment bankers say the A-share market is likely to be dominated by smaller deals this year. There were a total 277 IPOs in the Shanghai and Shenzhen exchanges in 2011, mostly small deals as well.

The near-term outlook for the A-share market is quite divided. Bulls say that stock prices have reached a very attractive level after two consecutive years of losses, whereas bears worry that overall market sentiment remains weak and that the economic slowdown will weigh on corporate earnings.

Many new measures are expected after the appointment of China's new chief securities regulator, Guo Shuqing. Early this month, the China Securities Regulatory Commission (CSRC) announced the names of domestic IPO applicants for the first time, listing around 500 domestic companies applying to either the Shanghai or Shenzhen exchange.

The news stirred fears among some market participants that the weak A-share market is in no condition to digest so many new equities. However, Edmond Chan, a partner of capital market services at PricewaterhouseCoopers, argued that investors shouldn't read too much into the big number of applicants.

"The authorities may not approve some of the applications and, even if they do, it may take some time for the companies to actually come to the market," he said.

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