Shenhua Energy raised $2.95 billion yesterday (June 8) from a 3.063 billion share offering priced at HK$7.50 per share. This represented the bottom quarter of an IPO range of HK$7.25 to HK$9.25 per share, although specialists say the leads had only ever really been realistically talking to accounts on a range of HK$7.25 to HK$8.25.
The H share deal also priced some hours later than expected after a lengthy pricing discussion between the company and lead managers CICC, Deutsche Bank and Merrill Lynch. The outcome of this was a decision to price two notches below where the deal been cleared in order to try and ensure an orderly secondary market debut.
Specialists say the upper limit where the deal could have priced and cleared was HK$8 per share, although a significant number of institutional orders would have dropped away at this point. It could also have comfortably cleared at HK$7.75 per share.
The leads also attempted to bolster the book by heavily skewing allocations towards institutional accounts. On a post shoe basis, institutions have been allocated $1.8 billion, strategic investors $1.1 billion, the Japanese POWL $250 million and Hong Kong retail $221 million.
The retail order book is said to have closed 16 times oversubscribed with 36,000 applications. This meant the first clawback was triggered and retail allocations were increased from 5% to 7.5% of the total.
Under the lead management of Nomura, the Japanese retail order book attracted a very strong following just over the $5 billion mark and was almost completely price insensitive. On a post shoe basis, this means the POWL (Public Offering Without Listing) will be allocated about 7% of the deal
Ahead of pricing, the three bookrunners also secured six strategic orders totaling $650 million. During the book building process, these six investors placed incremental orders for a further $450 million and were joined by one other corporate bringing the total number in the strategic tranche up to seven.
Unlike many other big China IPO's, the leads decided to ignore a long tail of Hong Kong corporate orders in favour of maintaining a large institutional tranche. About 400 institutional accounts placed orders of which about 15 were for more than $100 million.
After stripping out all the other tranches, the institutional book closed four-and-a-half times covered. By geography institutional demand split 40% Asia, 35% US and 20% Europe.
"The book was heavily dominated by long-only accounts as a lot of hedge funds are still bleeding money," says one observer. "The leads exerted a lot of discipline over the book in an effort to keep control over it in a difficult market. They wanted to make sure the book never run ahead of them or they ahead of the book."
Whether the leads' strategy translates into a successful secondary market debut is likely be heavily dependent on market conditions over the next few days. This time almost a year to the day, Ping An Insurance followed a similar tack with what was then Asia's largest IPO of 2004.
In similarly difficult market conditions for Chinese stocks, Ping An's management opted to price the $1.83 billion IPO below the market clearing level in order ensure a strong secondary market debut. The company's lead managers praised their foresight for not wanting to sweep up the last dollar off the table in what marked a relatively unusual stance for an Asian company.
Perhaps it was too just too out of character for the region. Pricing below the mid point of the range was subsequently interpreted as the sign of a weak deal and Ping An was unable to buck the market's downward trend after it was listed. Within a couple of weeks it had traded down from an IPO price of HK$10.33 to HK$9.50 before shooting back up to a high of over HK$12.
What many help Shenhua is an IPO price that is seen as fairly valued. In this respect, the leads clearly did a good job managing their client's aggressive price expectations.
Non syndicate bankers say Shenhua management had initially hoped to price the IPO at 10 times 2005 earnings and this is one of the reasons why the leads went out with such a wide price range. At pricing, the company has been valued at 8.8 times the syndicate's consensus forecast for 2005.
This places it at a premium to locally-listed comparable, Yanzhou Coal, which is currently trading around 7.5 times 2005 earnings after slipping marginally over the last week. However, Shenhua has come at a discount to a global comp like Peabody Energy, currently trading around 14 times.
Aside from market conditions the second main hurdle the leads faced was the global coal cycle, which many believe has peaked. However, Shenhua's power assets should have acted as an earnings kicker and may now do so during secondary market trading. Local IPPs such as Datang, Huaneng and China International Power, for example, are all trading in the low teens.
