Tianhe Chemicals raised $654 million in a Hong Kong initial public offering on Friday after pricing 2.8 billion shares towards the bottom end of its targeted range.
It is the fourth-largest IPO in Hong Kong so far this year and comes at a time of renewed interest in local listings.
The Chinese chemical company priced the shares at HK$1.80, near the lower end of its HK$1.75 to HK$2.25 price range, under the lead of Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley and UBS.
Over 100 institutional investors participated in the deal, making up nearly 98% of the book, as retail investors stayed away due to a lack of familiarity with Tianhe and the chemicals sector generally.
The company relied heavily on long-only institutional investors and niche specialist funds focused on chemical companies to complete the deal. As a result, the top ten investors made up 60% of the offering, a banker close to the deal told FinanceAsia.
Tianhe offered 11% of its enlarged share capital for sale in the IPO and just over a quarter of that comprised secondary shares. The selling shareholders included Chairman Wei Qi and his family as well as Jimmy Chen, a consultant to the company, who will maintain significant stakes in the company.
The IPO price achieved gives the company a market capitalisation of $5.9 billion and values Tianhe’s shares at around 10.5 times 2014 earnings, based on a blended syndicate forecast. This price-to-earnings ratio represents a discount to Tianhe's international competitors in the lubricant additives (LOA) and specialty fluorochemicals (SFC) sectors.
The two largest listed players in each sector are US duo NewMarket Corp and Dupont. NewMarket is trading at 21 times forward 2014 earnings while Dupont is trading at 19 times estimated 2014 earnings. Their shares have risen 17% and 9% year-to-date, respectively, so far this year.
Sector outlook
Tianhe is China’s largest player in both LOA and SFC, with a 41% market share in LOA — lubricants that optimise fuel performance and combustion abilities — and 2.9% in the latter, according to Frost & Sullivan.
The company plans to use 30% of the proceeds to develop lubricant activities, expand capacity and research and development. Another 30% will be used to develop its SFC units and 39% will be used to repay the Wei family’s pre-IPO convertible bonds.
During its IPO roadshow, company executives and bankers played up the high-growth potential of anti-mar and stain-proof coatings. These are used on a number of products, including smartphones and ATMs, to repel water, oil and other liquids. Frost & Sullivan estimates that Chinese demand for both will grow at a compound annual growth rate of 19% and 14.2%, respectively, between 2013 and 2018.
HK IPO market
Tianhe Chemicals is the fourth-largest IPO in Hong Kong so far this year, following HK Electric Investments $3.1 billion offering in January, China CNR Corp’s $1.2 billion IPO in May and Harbin Bank’s $1.1 billion flotation in March.
Despite pricing near the bottom, Tianhe appears to have caught positive momentum this week, following successful IPOs by water purifier Ozner Water and waste-to-energy company Dynagreen.
Although markets appear to be recovering — the Hang Seng China Enterprises Index has risen 6% in the past month — it has been a disappointing year for Hong Kong-listed companies. HK Electric is down 3% so far this year, while Harbin Bank is down 6%. China CNR’s is up 1%.
