Modest gains yesterday and on Friday helped keep the Hong Kong stock market in the black (up 1.5% since the start of the year), but did little to alter the highly cautious investor sentiment that has pushed the Hang Seng Index 11.8% lower since the beginning of May, market watchers say.
The enthusiasm for market newcomers is particularly low and yesterday morning China Yongda Automobiles Services Holdings was forced to cancel its initial public offering after failing to attract much demand. The company late last week extended the institutional bookbuilding by three days in an attempt to salvage the transaction, but it didn’t revise the terms and in the end it wasn’t able to sign up much additional demand. The company, which is the largest BMW dealer in China, had been aiming to raise between $306 million and $435 million.
However, that didn’t stop bankers from kicking off investor education for two more listing candidates yesterday, although bankers involved in both transactions say whether or not they go ahead and launch the roadshow at the end of it will depend both on the feedback from investors and the market conditions at the time. In both cases, the investor education is expected to last for a minimum of two weeks.
The larger of the two is Inner Mongolia Yitai Coal, a Chinese private enterprise which already has US dollar-denominated B-shares listed in Shanghai and is looking to raise at least $1 billion. The second one is Huadian Fuxin New Energy, which is the renewable energy arm of the China Huadian Group, which is one of the top five power producers in China. The company is expected to raise $400 million to $600 million from the Hong Kong listing.
Both companies are faced with the fact that several of their closest comparables are already listed in Hong Kong, which means the interest in their stock will be somewhat dependent on the performance of the comps during the marketing. Both are likely to argue that they have enough differentiation to justify investors buying into them too, but if the valuation of the comps comes under pressure that may not matter — something that Yongda experienced first-hand.
Yitai Coal
Yitai Coal, which has been trying to obtain an approval from its Chinese regulators to list in Hong Kong for a couple of years, also has the additional challenge of having to take the price of its B-share into account. As per the guidelines from the Chinese regulators, the H-share IPO cannot price below the 20-day moving average price of the B-share, determined on the day the IPO received regulatory approval. For Yitai Coal, this was on April 11, which means that at the moment, the floor price is above the current market price. That could make it difficult to price the H-share, especially since international investors can already buy the B-shares in Shanghai. However, source said yesterday that it is not entirely clear how strict that floor price really is.
The company is currently aiming to sell about 15% of its enlarged share capital in the form of new shares, although the final deal size may still change. The company is about 60.1% owned by its parent company Yitai Group and has a market capitalisation of $7.9 billion.
According to a preliminary prospectus published on the Hong Kong stock exchange website, it is the largest coal miner in Inner Mongolia — a region that is known for its high-quality coal and is home to the largest proven coal reserves among the Chinese provinces — and one of the largest in China based on 2011 revenues.
Yitai Coal produces primarily thermal coal for use in power plants and currently has seven operating mines and two mines under development. It is also planning to buy an additional five mines from its parent company following the IPO, partly to increase the scale of its business, partly to reduce the potential competition between Yitai Group and the listed entity. The acquisition will set it back approximately Rmb8.45 billion ($1.3 billion) and will increase its marketable reserves to about 1.24 billion tonnes from 1.15 billion tonnes. Based on its 2011 numbers, the additional five mines would have boosted its annual production volume to 47.8 million tonnes from 35.1 million tonnes and its revenues to Rmb27 billion from Rmb16.5 billion.
The IPO is being arranged by Bank of America Merrill Lynch, BNP Paribas, BOC International, CICC, Macquarie and UBS.
Huadian Fuxin
Huadian will be the fourth among China’s big five power producers to list its renewable energy unit in Hong Kong (after Datang, Huaneng and Guodian, the controlling shareholder of Longyuan Power) but while the other three are focusing primarily on wind, Huadian Fuxin has a more diverse business model. At the end of 2011, its generating capacity was divided between hydro-power (2.2GW), wind power (2.2GW), a legacy thermal coal business (2GW) and others, including solar and nuclear power (80MW).
Going forward, the growth will come mainly from wind, solar and gas-fired power generation, sources say, although hydro-power is expected to remain a key revenue generator.
The current intention is to sell about 25% of the company in the form of new shares, although again the final deal size may change depending on the feedback during investor education. Sources say the company has already lined up a number of cornerstone investors, although the size of their investment has yet to be determined.
As per the current timetable, Huadian Fuxin is aiming to launch the institutional roadshow on June 11 and to fix the price on June 19, which would allow it to list before the end of June.
Bank of America Merrill Lynch, Citic Securities, CLSA and UBS are joint bookrunners.
Yongda Auto
Meanwhile, Yongda’s IPO got caught up in a sharp deterioration in sentiment towards Chinese auto dealers. A lot of negative news flow surrounded the sector during the bookbuilding, including talk of rising inventories and weaker economic data out of China. Both Baoxin Auto Group and China ZhengTong Auto Services Holdings also failed to get a high-yield bond out the door, which contributed to a sharp sell-off in their respective stocks.
Baoxin Auto lost 30% during Yongda’s bookbuilding, which started on May 14, while ZhengTong fell 27.5%. Zhongsheng Group Holding was off 10.7%. Like Yongda, both ZhengTong and Baoxin focus primarily on the sale of BMWs, while Zhongsheng is an authorised dealer for Mercedes-Benz, Lexus and Audi, as well as for Toyota, Nissan and Honda.
The drop in share prices meant that while Yongda was initially marketed at a discount versus the comps, by the end of the roadshow bankers were trying to convince investors to buy it at a premium. In a deteriorating market, that was not an easy task, even if Yongda happens to be the market leader with regard to BMW sales.
Yongda’s IPO was covered after two days, but as the sell-off of the comps intensified and global markets showed few signs of recovering, investors began to pull their orders. There was no information on the final coverage level, but one source said there were fewer than 20 institutional orders in the book. And most investors participated in very small sizes.
Other sources added that it wouldn’t have mattered if the deal had been re-offered at a discount, investors are simply not prepared to add exposure to Chinese auto dealers at the moment. Or as one source put it: “you don’t just need the market to stabilise; you need the sentiment around this particular sector to change.”
As reported earlier, the 10% retail tranche was less than 2% covered, implying that the Hong Kong public committed less than $1 million to the deal.
Yongda was trying to sell 312.2 million shares, or 20% of its post-issue share capital. The shares were offered at a price between HK$7.60 and HK$10.80, which translated into a 2012 price-to-earnings ratio of 8.0 times to 11.3 times on a pre-shoe basis.
HSBC and UBS were joint global coordinators and bookrunners. Bocom International was a bookrunner.
