Shanghai Prime Machinery (SPM) has raised HK$1.26 billion ($163 million) from the sale of 44.6% of its enlarged share capital at HK$2.10 per share, while Dalian Port tapped investors for HK$2.16 billion ($279 million) by selling 30% of the company at HK$2.575. Both deals saw maximum clawbacks, which meant retail investors ended up with half the offers.
While the two companies operate in entirely different sectors, the attraction for investors was similar in that they are essentially both a play on ChinaÆs rapid economic expansion - SPM feeds a diversified set of components and tools to a wide range of mainland industries and Dalian Port is the leading oil and container port in Northeastern China, benefiting greatly from the countryÆs increasing imports of crude oil.
Data out last week, which showed that ChinaÆs gross domestic product expanded at a faster-than-expected 10.2% pace in the first quarter, provided a last-minute boost to the already strong interest in the two companies.
In addition, speculation about a renminbi appreciation in connection with President Hu JintaoÆs visit to the US and the governmentÆs go-ahead for qualified domestic institutional investors to start investing abroad triggered a renewed rush into China-related stocks last week, pushing up the valuations for their listed peers.
SPM, which closed its IPO on Thursday, fixed the price for a valuation of 12.6 times its projected 2006 earnings. At the beginning of the offer period, other Hong Kong-listed mid-cap industrials traded at an average forward PE ratio of 12-13 times, according to syndicate research.
Credit Suisse was sole bookrunner for the offering with BNP Paribas Peregrine and Macquarie Securities acting as co-leads.
The retail tranche, which initially accounted for 10% of the deal, attracted subscriptions for 488 times the amount of shares available, according to a source familiar with the offering. The strong demand triggered an automatic clawback and an increase of this tranche to 50% of the total.
The institutional tranche was 97 times covered post-clawback, suggesting most investors would have received only a fraction of the shares they ordered and may be chasing the stock in the secondary market to top up their allocations. The bookrunners didnÆt impose any official cap on orders, although given the strong likelihood of the retail tranche being more than 100 times subscribed, most institutional investors were said to have applied reason to their bids and kept orders at no more than 10% of the deal size.
A separate source said about 90% of the investors who met with the company on a one-on-one basis ended up submitting an order and because the company spent more time marketing in Asia there was likely to have been a bias of orders from here.
SPM offered 600.56 million new H-shares at a price between HK$1.70 and HK$2.10 apiece. If the greenshoe is exercised in full, 48.02% of the company will be in public hands and the total deal size will reach HK$1.45 billion ($187 million).
The company has five divisions, the largest and most high-tech of which makes turbine blades and contributed about 55% of operating profit last year. The other divisions comprise bearings, cutting tools, electrical motors and fasteners, including nuts and bolts.
Dalian Port, which is being brought to market by BNP Paribas Peregrine and UBS, priced its offer for a valuation of 17.9 times its 2005 earnings after seeing virtually no price sensitivity in the book, sources said. This compares favourably with similarly sized, container terminal operator Xiamen International Port, which trades at a 2005 PE of about 21-22 times after gaining 40% since its December trading debut, according to syndicate estimates.
Including China Merchants International Holdings and Cosco Pacific, Dalian PortÆs Hong Kong listed container port comparables trade an average 2005 PE multiple of about 19.5 times, while mainland-listed container port operators trade at an average trailing PE of 15.5 times. There are no listed comparables for the companyÆs higher-margin oil handling operations in either Hong Kong or China.
But it was the companyÆs strong position as one of ChinaÆs three main ports for oil imports that primarily hit it off with investors, who focused on reports such as that from the Organisation of Petroleum Exporting Countries which projects ChinaÆs demand for imported oil will increase to 380 million tonnes by 2010 from 127 million tonnes last year and more than triple to 570 million tonnes by 2020.
Retail investors subscribed for more than 850 times the amount of shares available to them, again triggering an increase in the size of this tranche to 50% from 10% of the total. The institutional tranche was said to have been more than 90 times covered post-clawback, although the size of the book would have been skewed by the fact that orders were capped at $10 million each.
Since one third of the total share offering were set aside for four strategic investors, the allocation available to institutional investors will be no more than 20% of the total deal size, or $55.8 million û less than the $81.5 million Shanghai Prime Machinery allocated to institutions in its deal, which was about 40% of Dalian PortÆs total deal size to begin with.
According to the prospectus, JapanÆs largest shipping line Nippon Yusen Kabushiki Kaisha will buy 13.7% of the offering through a Hong Kong subsidiary and China Shipping (Group) Co will buy 13.3%, while Hutchison WhampoaÆs port operating arm and Singapore ports operator PSA International will each take 3.3%.
These four companies will have a combined 10.1% stake in the company at the time of listing.
Dalian Port offered 840 million H shares at HK$2.175 to HK$2.575 each in an IPO that closed last Friday. There is a 15% greenshoe that could boost total the total deal size to $320 million.
SPM starts trading on Hong KongÆs main board on April 27 and Dalian Port on the following day.
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