China Machinery Engineering’s IPO covered at launch

The state-owned engineering contractor seeks to raise up to $500 million, of which PICC and four other cornerstone investors will take a combined $165 million.
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One of CMEC's thermal power stations in Malaysia
<div style="text-align: left;"> One of CMEC's thermal power stations in Malaysia </div>

China Machinery Engineering Corporation, a state-owned international engineering contractor, kicked off a four-day roadshow yesterday for an initial public offering that is targeting to raise between HK$2.94 billion and HK$3.88 billion ($380 million to $500 million). The stock is scheduled to start trading in Hong Kong on December 21.

Because of the tough environment for new listings in Hong Kong this year, China Machinery launched its offering with solid demand visibility. The deal, including a 15% greenshoe, is already covered thanks to cornerstone investors and large anchor orders, a source said yesterday.

Five cornerstone investors are taking a total of $165 million worth of shares, accounting for between 33% and 43.4% of the deal. They are: CSR (Hong Kong) and PICC, which are investing $50 million each; Nanjing Turbine & Electric Machinery, which is paying $30 million; Xi Lian International, which is taking up $20 million; and China Overseas Finance Investment, which is paying $15 million, according to the company’s prospectus.

China Machinery has a primary focus on engineering, procurement and construction projects and particular expertise in the power sector. 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, the prospectus says.

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

China Machinery is offering 718 million shares at a price between HK$4.10 and HK$5.40 each. Ten percent of the deal is earmarked for the Hong Kong retail public, while the remaining 90% is intended for the institutional tranche.

There is a greenshoe option of up to 15%, or an additional 107.7 million shares, which if exercised in full could increase the total deal size to as much as $575 million.

The price range values the company at a 2013 price-to-earnings ratio of between 5.2 times and 6.8 times, according to the source.

That puts China Machinery at a discount to its peers. According to a syndicate research report, its main comparables include China CAMC Engineering, Shanghai Electric, Dongfang Electric and Harbin Electric.

China CAMC Engineering is currently trading at a 2013 P/E multiple of 20.7 times, Shanghai Electric is quoted at 9.3 times, Dongfang Electric at 9.1 times and Harbin Electric at 5.9 times, according to Bloomberg data.

Along with the institutional roadshow, the Hong Kong public offering also opened yesterday and will continue until Friday.

The company began its international engineering contracting business in 1980 and has since undertaken engineering contracting projects in more than 45 countries around the world, according to the prospectus. The company offers a full spectrum of turnkey solutions to governments and corporate customers around the world, especially in developing countries.

Its ample overseas experience and good track record are some of the qualities that investors like about the company, the source said.

This year, China Machinery is expected to book a net profit of Rmb2 billion ($318 million), which is an increase from Rmb1.5 billion in 2011 and Rmb1.1 billion in 2010, according to the syndicate report.

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

Year-to-date, the IPO volume in Hong Kong stands at $10.1 billion, 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.

On a positive note, however, PICC Group rose 6.9% in its trading debut on Friday. The Chinese insurer raised $3.1 billion from Hong Kong’s biggest IPO this year after fixing the price slightly above the bottom of the range.

The company secured $1.8 billion of cornerstone demand ahead of the IPO, including a number of international insurance companies such as American International Group (AIG).

After extending the gains on Monday, PICC fell 1.6% yesterday to HK$3.69, but remains above the IPO price of HK$3.48. The Hang Seng Index, which rose 0.2% yesterday, is up about 21% so far in 2012.

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