China Railway Group has signed nine cornerstone investors who will jointly invest HK$3.18 billion ($410 million) in the H-share portion of its ongoing initial public offering, sources close to the deal confirmed yesterday.
Among these investors, who will receive a guaranteed allocation in return for a 12-month lockup, are China Investment Corp (CIC) – China’s recently created $200 billion sovereign wealth fund – which will buy HK$780 million worth of shares. This will be the fund’s first investment in a Hong Kong IPO and only its second investment overall after taking a $3 billion stake in private equity firm Blackstone earlier this year. So far, that inaugural investment has been a disappointment as Blackstone’s share price has fallen after its IPO in June, which may explain why CIC is now looking to put its money to work closer to home.
Given its large pool of capital, it is possible that the fund could become a regular investor in IPOs of Mainland companies in Hong Kong, although observers suggest that it is likely to focus its investments on state-owned enterprises or companies within strategically important industries. Having had a leading position within China’s railway construction industry since the 1950s, China Railway definitely fits this profile. It is currently the largest construction company in both China and Asia, and the third largest in the world in terms of revenues. It also comes under the direct supervision of SASAC (the State-owned Asset Supervision and Administration Commission of the State Council).
The company derives about 88% of its revenues and just over 60% of its operating profit from infrastructure construction, which aside from railways and subways also include the construction of highways, bridges, tunnels, hydroelectricity projects, ports, airports and municipal works. The rest of the revenues and profits come from engineering equipment and component manufacturing; survey, design and consulting; and real estate development.
Having kicked off the roadshow for the H-share portion of its IPO yesterday, the company aims to raise up to HK$19.2 billion ($2.48 billion) from its Hong Kong listing alone. It is also conducting a near-simultaneous A-share offering that is targeting up to Rmb22.44 billion ($3.03 billion) ahead of a Shanghai listing.
Together, these two offerings will give a maximum combined deal size of $5.51 billion, which could see China Railway squeeze in just ahead of China Citic Bank as this year’s largest Hong Kong IPO. Citic Bank raised $5.4 billion from the base offering of its dual listing in April this year. However, looking at the H-share portions alone, Citic Bank was significantly larger at $3.7 billion, compared with China Railway’s $2.48 billion.
The cornerstone tranche will account for between 16.6% and 19% of the H-share offering, depending on the final price, which is in line with other Hong Kong IPOs and should help to anchor the deal amid the current volatile market environment. The other eight cornerstones, which are all familiar faces when it comes to Hong Kong IPOs, will each buy HK$300 million worth of shares.
According to sources, these investors are: China Life Franklin, a joint venture between the asset management arm of China Life Insurance and fund management firm Franklin Templeton; the Government of Singapore Investment Corp; a fund controlled by Leslie Lee Alexander, owner of the Houston Rockets basketball team; Kerry Group chairman Robert Kuok; the Kwok family, who is the controlling shareholder of Sun Hun Kai Properties; Peter Woo, chairman of Wheelock & Co; a fund owned by Henderson Land Development chairman Lee Shau Kee; and hedge fund Och-Ziff.
China Railway is set to list in Shanghai on December 3 and in Hong Kong on December 7, making this virtually a dual listing. (For more details on this, please see the FinanceAsia story published on November 20).
The H-share portion of the deal, which accounts for 45% of the total base offering, is marketed within a range of HK$5.03 and HK$5.78 per share, while the A-share offering range is Rmb4 to Rmb4.80. The final A-share price will be determined on Thursday, while the H-share price won’t be fixed until November 30.
After the IPO, but before the exercise of the greenshoe, the A-shareholders will own 22.5% of the company, while the H-shareholders (including the National Social Security Fund) will own 17.6%. The remaining 59.9% will remain in the hands of its parent, China Railway Engineering Corp.
BOC International and UBS are acting as joint underwriters both for the A-share and the H-share offerings. They are joined by two other bookrunners on the H-share deal – ABN AMRO Rothschild and JPMorgan.