BBMG draws massive demand for $768 million IPO

Investors who have been reading the Hong Kong press over the past week wouldn't have been surprised to learn that BBMG Corp's $768 million initial public offering ended up being one of the most sought after Hong Kong IPOs ever. Not only did several Hong Kong tycoons reveal that they had applied for a large number of shares in the offering, but Hong Kong's de-facto central bank also had to intervene twice this week to prevent the heavy inflow into the Hong Kong dollar from pushing the currency outside its pre-set trading band against the US dollar.

According to sources, IPO subscriptions from Hong Kong retail investors, which would have included at least some of the tycoons in their capacity as high-net-worth individuals, exceeded the amount initially earmarked for the 10% retail tranche 770 times. This means it would have tied up at least HK$458 billion ($59 billion) of cash during the subscription period, which is more than the HK$447 billion attracted by Alibaba.com's IPO in October 2007 and second only to China Railway Construction Corp's IPO last year. That deal, which at $2.55 billion (H-share tranche only) was more than three times the size of BBMG's offering, tied up HK$531 billion worth of retail cash.

But it wasn't just retail investors who were keen on the Chinese company, which is the largest supplier of building materials in Beijing, Tianjin and the Hebei province and is also involved in property development and investments. Institutional investors too wanted a piece of the action - a piece which, as it turned out, ended up being rather small. According to sources more than 500 institutional investors submitted orders and the combined order amount was said to have been 95 times the amount available to them. That amount was about $516 million after excluding a $175 million portion that was bought by five cornerstone investors and the initial 10% retail tranche.

However, the massive retail demand triggered a maximum clawback that increased the size of the retail tranche to 50% of the deal, reducing the institutional portion even further. Even if one includes the 15% greenshoe, the three bookrunners were left with only about $325 million worth of share to divide between institutional investors other than the cornerstones. A tough task and one that people involved said took a good 20 hours to sort out. 

By comparison, the pricing call would have been a relatively quick affair as the level of oversubscription left the company with little choice but to fix the price at the top of the HK$5.18 to HK$6.38 range for a total deal size of HK$5.95 billion ($768 million). This makes it the second largest IPO in Hong Kong this year after aluminium extrusion company China Zhongwang Holdings, which raised $1.26 billion in late April. If the BBMG's overallotment option is exercised in full, the total amount raised will increase to $884 million.

At the final price of HK$6.38, the company is valued at 13.9 times this year's earnings, based on the consensus forecasts among the three bookrunners. This put it at a significant discount to Anhui Conch Cement, a leader in the cement manufacturing sector, which trades at a 2009 price-to-earnings multiple in the low 20s.

BBMG's valuation is largely in line with that of smaller players China National Building Materials and China Shanshui Cement Group. This could be justified, some observers say, because of BBMG's property business - especially since that is a sector which is rebounding from last year's slump in demand and prices, and could end up becoming a real earnings kicker.

Last year, BBMG derived about 70% of its revenues from cement and other building materials, however, while property development accounted for 23%. The company's has a strong position in the cement industry, which is evident by the fact that it supplied the cement for more than 90% of the buildings constructed for last year's Beijing Olympics.

The government's $585 billion stimulus package, which is largely focused on infrastructure, is expected to boost the demand for cement and other building materials over the next couple of years. As a leader in its region, BBMG is also expected to benefit from the government's intention to consolidate the cement industry and close down small and inefficient cement factories. According to the company's preliminary listing prospectus, the aim is to reduce the number of cement producers to 2,000 from 5,000 by 2020.

The company, which is being brought to market by J.P. Morgan, Macquarie and UBS, sold 933.3 million new shares, which represents 25% of the enlarged share capital.

Of that, cornerstones took 22.8%, which they have committed to hold for at least six months.  They include China Investment Corp, China's sovereign wealth fund, which bought $35 million of stock; China Life Insurance and Bank of China Investment Group, which took $50 million each; and the Och-Ziff hedge fund and an investment company controlled by Robert Kuok of the Kerry Group, which invested $20 million each.