This makes China Railway slightly larger than China Citic BankÆs $5.4 billion IPO in May this year, based on their respective base offering sizes. Once you include the greenshoe, however, China Citic Bank is somewhat larger at $5.96 billion, compared with $5.88 billion for China Railway (assuming it too exercises the shoe in full). The reason for this is that China Citic BankÆs H-share portion is larger than that of China Railway, and A-share offerings donÆt use greenshoes to stabilise the deal in the aftermarket.
The demand was certainly sufficient to back that decision, but there had been some speculation that the company might want to set the final price slightly lower given that the market has become less forgiving towards newcomers over the past couple of weeks. Notably, shipping company Sinotrans Shipping and heavy-duty truck manufacturer Sinotruk both traded down on their debuts despite well-filled order books. Some observers had suggested that China Railway, being such a large offering, might leave a little bit extra on the table for investors to avoid a similar fate.
However, others argue that as long as the companyÆs A-shares trade well in their debut today, the H-shares should also be able to edge up when they start trading on Friday. While this has certainly been the trend for all other major A-share IPOs this year, the mood may have changed given that ChinaÆs domestic stock markets have been under pressure lately. The Shanghai benchmark index lost 18% over the past month. The A-share portion of China RailwayÆs deal was also priced at the top of the range.
BOC International and UBS acted as joint underwriters both for the A-share and the H-share offerings. They were joined by two other bookrunners on the H-share deal û ABN AMRO Rothschild and JPMorgan.
According to a source, the H-share portion, which accounted for 45% of the total offering, attracted orders for 40 times the shares available to institutional investors after taking out the cornerstone tranche and adjusting for the retail clawback. More than 1,000 institutional investors were said to have submitted orders. The retail tranche was 209 times subscribed which triggered a full clawback that increased the size of this tranche to 25% of the total deal from the original 10%.
About 70% of the demand came from Asia with Europe accounting for 20%, the US 8% and other regions 2%.
This was in sharp contrast to ChinaÆs leading refrigerant and polymer producer Dongyue Group, which saw its retail tranche only five times subscribed when it closed on Thursday while the institutional tranche was said to have been ôseveral timesö covered. This led the company to fix the price towards the low end of the HK$2.05 to HK$2.63 range at HK$2.16, which allowed it to raise HK$1.12 billion ($144 million). Citi was the sole bookrunner.
While Dongyue was likely impacted by the increasingly weaker interest in new listings, China Railway escaped much of that because of its size and market position.
ôInvestors all wanted this deal,ö notes one source close to the offering. ôSome people were cautious about it being part of the construction sector, but still bought in on the basis that it is expected to become part of the major indices longer term, that it is a proxy for China growth and because it is a big, liquid transaction.ö
The H-share portion of the deal consisted of 3.326 billion shares, or 16% of the enlarged company, plus the 15% greenshoe. They were offered in a range between HK$5.03 and HK$5.78 and priced at the very top. While the A-share tranche was also priced at the top, that range was set slightly lower at Rmb4 to Rmb4.80, which translates to HK$4.20 to HK$5.03.
As a result, the H-share portion of the deal was priced at a 14.9% premium to the A-share portion. Since this is the first company to complete a near simultaneous A- and H-share listing, there is no precedent for how to price the two tranches in relation to one another and this weekÆs performance in the secondary market will be keenly watched to see if the strategy worked. Industrial and Commercial Bank of China and China Citic Bank, which are the only two companies to complete a proper dual listing, sold the A- and H-share portions at the same price (adjusted for the exchange rate).
China RailwayÆs offering is supposedly a compromise between BeijingÆs desire to have the countryÆs top companies list in the domestic market first and a realisation that many of these companies want and need to gain access to the international investors that Hong Kong can offer. If successful it is expected to become the blueprint for future ôdualö listings in Hong Kong and Shanghai.
China Railway is the largest construction company in China and Asia and the third largest in the world with transportation infrastructure and municipal works projects in more than 55 different countries to its name. Among the key selling arguments, however, were the prospects on its home turf following an ambitious railway expansion plan outlined by the Chinese government in its 11th five-year plan. The target is to invest Rmb3.8 trillion ($512 billion) on the construction of transportation infrastructure between 2006 and 2010, of which Rmb1.25 trillion ($168 billion) will go towards railways. Investments in railways will increase by 257% versus the 10th five-year plan, while investments in metropolitan railway systems will increase by 150%.
The listing candidate, which derives just over 60% of its revenues from infrastructure construction û the rest comes from engineering equipment and component manufacturing; survey, design and consulting; and real estate development û should be in an excellent position to benefit from this, sources say.
Based on the consensus forecasts from the joint global coordinators for the H-share offering (BOCI, JPMorgan and UBS), the final price values China Railway at a 2008 price-earnings ratio of 26.6 times or 27.2 times including the greenshoe. This compares with about 38 times for China Communication Constructions Corp (CCCC), which is regarded as a key benchmark, given that the two companies operate in many of the same markets. CCCCÆs main focus is on ports design and construction, but it is also active within highway construction and municipal works projects. CCCC has rallied 380% since its own IPO in December 2006.
They note that the companyÆs new contract value grow to Rmb197.5 billion in 2006 from Rmb131.2 billion in 2004. In the first nine months of this year, the company secured new contracts worth Rmb157.5 billion and as of September 30, its order backlog amounted to Rmb191.7 billion.
In 2006, the company posted a net profit of Rmb2.05 billion on revenues of Rmb153.6 billion. According to the company, its bottom line expanded 33% to Rmb643 million in the first half this year.
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