China Machinery Engineering prices Hong Kong IPO at top end

Robust demand leaves both the retail and institutional tranches heavily oversubscribed and allows the state-owned engineering contractor to raise $500 million from the offering.
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A CMEC transmission line project in Congo
<div style="text-align: left;"> A CMEC transmission line project in Congo </div>

China Machinery Engineering Corporation, a state-owned international engineering contractor, has raised HK$3.88 billion ($500 million) from its initial public offering, after fixing the price at the top of the indicative range. The stock is scheduled to start trading in Hong Kong this Friday.

Unlike many other Hong Kong IPOs this year, China Machinery attracted huge interest from local retail investors. According to a source, the retail portion was about 57 times oversubscribed, which means retail investors committed about $2.9 billion to buy shares — almost as much as the $3.1 billion they spent buying shares in PICC Group’s much larger IPO a couple of weeks earlier.

The strong demand triggered a clawback that increased the retail portion of the deal to 40% from 10%. This was only the second time a clawback was triggered on a Hong Kong IPO since Sun Art Retail went public in July 2011, according to Dealogic. The first time was for PICC, which saw its retail tranche increase to 7.5% from 5%.

The remaining 60% of China Machinery’s offering was allocated to institutional investors.

After the clawback and excluding the shares taken up by cornerstone investors, the institutional portion was also heavily oversubscribed, the source said. The deal was already covered when the four-day bookbuilding kicked off last Tuesday, thanks to five cornerstone investors and large anchor orders.

That type of precaution has become increasingly common this year as a way to deal with the poor appetite for new listings. The five cornerstone investors bought a combined $165 million worth of shares, or 33% of the final deal size.

China Machinery sold 718 million shares at HK$5.40 each. The shares were marketed at a price between HK$4.10 and HK$5.40, which valued the company at a 2013 price-to-earnings ratio of between 5.2 times and 6.8 times.

At 6.8 times, China Machinery comes at a sizeable discount to most of its key comparables. According to a syndicate research report, they are China CAMC Engineering, which is currently trading at a 2013 P/E multiple of 21.4 times; Shanghai Electric, which is quoted at 9.5 times; Dongfang Electric, which is at 9.4 times; and Harbin Electric, which is trading at 6.1 times.

Demand came from investors in China, the rest of Asia and Europe, and the allocation was mostly focused on long-only funds, the source said.

The five cornerstones were all Chinese, however: CSR (Hong Kong) and PICC, which invested $50 million each; Nanjing Turbine & Electric Machinery, which bought $30 million worth of shares; Xi Lian International, which took up $20 million worth; and China Overseas Finance Investment, which invested $15 million.

The deal comes with a 15% greenshoe option that may add up to 107.7 million shares and could increase the deal size to as much as $575 million.

Investors like the company’s overseas experience and good track record, as well as the high-quality management team, the source said. It has a strong pipeline of projects for the next three years and new projects are also coming, the person added.

China Machinery has a primary focus on engineering, procurement and construction projects and particular expertise in the power industry. It also has a trading business covering more than 150 countries and regions, primarily in Asia, Europe and Africa and to a lesser extent in North America, South America and Oceania, according to the listing prospectus.

The company plans to use a majority of the IPO proceeds to finance its international engineering contracting projects in the power and transportation industries. It considers power, transportation and telecommunications as its core focus, but it is also engaged in other industries such as water supply and treatment, building and construction, manufacturing and processing plants, and mining and resources exploitation.

This year, China Machinery is expected to book a net profit of Rmb2 billion ($321 million), which is an increase from Rmb1.5 billion in 2011 and Rmb1.1 billion in 2010, according to the syndicate report.

The Hong Kong retail offering ran in parallel with the institutional bookbuilding, from Tuesday to Friday last week.

BOC International was the sole global coordinator and sponsor for the deal. ABC International, CIMB and ICBC International were joint bookrunners.

After China Machinery, the last Hong Kong IPO of size this year looks likely to be Wison Engineering Services. The Chinese engineering company launched a management roadshow and retail offering last Thursday with the aim of raising up to $273 million. The deal will close tomorrow and the listing is scheduled for December 28. Bocom International, Citi, Citic Securities, Deutsche Bank and UBS are joint bookrunners.

IPO volume in Hong Kong stands at $10.1 billion year-to-date, down 71% from $34.6 billion raised during the same period last year, according to Dealogic. After taking the top position for new listings in the previous few years, Hong Kong currently ranks fourth after New York, Nasdaq and Tokyo, the data show.

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