China Railway Signal IPO rolls onto the tracks

The state-owned railway control system developer launches pre-marketing, hoping that improving investor sentiment will enable it to price through CRRC.
Will investors signal their enthusiasm for Hong Kong's latest benchmark IPO?
Will investors signal their enthusiasm for Hong Kong's latest benchmark IPO?

China Railway Signal & Communication Corporation, the world’s largest railway control system developer, began pre-marketing its Hong Kong initial public offering on Monday.

Based on initial pricing indications of about 20 times 2015 earnings, the group should raise about $1.5 billion, or about $1.67 billion if its greenshoe is exercised.

The deal will provide a key test of investor sentiment at a time when China related equity markets are only just starting to recover from their recent rout and the primary markets are beginning to wind down as fund managers head off for their summer holidays.

One source close to the deal said China Railway Signal decided to press ahead anyway because it wants to complete the listing before September. “If the company waits until after the summer break, it will be required to submit additional auditing on its August business performance to the Hong Kong Stock Exchange,” one banker commented.

Stock markets have shown signs of stability over the past week. The Shanghai Composite Index is up 0.88% over the past five trading days, although the Hang Seng China Enterprises Index remains down 1.6%.

The Chinese government’s continued intervention and better-than-expected second quarter GDP figures have both helped to normalize sentiment on the mainland and encouraged 700 companies to resume trading since July 9.

Deal details

China Railway Signal plans to sell 20% of its enlarged share capital, or 1.75 billion H shares through the Hong Kong flotation, according to a term sheet seen by FinanceAsia. There is a traditional 15% greenshoe for an additional 262.5 million shares.

Both the base deal and greenshoe comprise primary shares. Clawbacks could see up to 20% of the deal allocated to retail investors in the event of a 100 times oversubscription ratio.

Pre-marketing will run through July 27 followed by a five-day roadshow and bookbuilding period between July 27 and 31. The company is targeting listing on August 7.

Roughly 30% of IPO proceeds will be set aside for research and development, 20% for fixed-asset investment, 20% for acquisitions, 20% for public-private-partnership projects and 10% for general corporate purposes according to the term sheet.


Sources close to the deal said that cornerstones are likely to comprise about 40% to 50% of the offering.

One investor told FinanceAsia he hopes the IPO will price at a discount to comparables such as Zhuzhou CSR Times Electric given how febrile market sentiment remains. However, he added that preliminary feedback is suggesting a valuation in line with Zhuzhou CSR.

Syndicate banks have assigned China Railway Signal a fair value of $8.6 billion to $11.9 billion equating to 23 to 32 times 2015 earnings.

Electrical control equipment maker Zhuzhou CSR is currently trading at 20.2 times consensus 2015 earnings. Having hit a recent low of HK$49 on July 8, the stock has since appreciated 17.3% and closed Monday at HK$57.5.

The other main comparable, CRRC, is trading at 17.54 times consensus 2015 earnings. The world’s largest railway equipment manufacturer was formed after a merger between CSR Corp and CNR Corp.

The joint entity resumed trading on June 8, but has subsequently fallen 31.8% after many analysts said it was overvalued. On Monday, it closed up 0.56%.


China Railway Signal was established in 2010 following the reorganization of CRSC, a state-owned rail control system developer supervised by the State-owned Assets Supervision and Administration Commission (Sasac).

It has a 65.2% market share of China’s high-speed railway control system market, according to the company’s exchange filings.

In 2014, 79% of the company’s revenue came from production and sales of railway control systems, while approximately 11% was generated by sales to urban transit operators.

One of the deal’s key selling points is the important role rail is playing in China’s “One Belt, One Road” initiative. This will not only extend China’s 16,000-kilometer long high-speed railway network, but will also forge closer trade and diplomatic links with neighbouring countries.

In March, Chinese Premier Li Keqiang said China will invest Rmb800 billion ($129 billion) in the domestic railway sector this year. In a recent research report, JP Morgan argued that there is a high possibility the target could be revised upwards to RMB 900 billion or RMB 1 trillion.

Wenzhou crash

China Railway Signal will be hoping its IPO finally draws a line under the negative publicity generated by the Wenzhou train crash of 2011.

In one of the world’s deadliest train accidents, two high-speed bullet trains crashed near the eastern Chinese city of Wenzhou, killing 40 and injured 172. A government report concluded that the accident was due to design flaws in the railway signaling system and poor management on the part of the Ministry of Railways.

China Railway Signal was the principal contractor for integrating the signaling system on the Wenzhou high-speed line. The report said it “did not fulfill its duty in overseeing the development of the technology.”

In response to the incident, the company has said it has improved its quality and safety organizational systems.

Notwithstanding the accident, China Railway Signal has reported consistently solid profit growth. Net profit increased from Rmb1.09 billion in 2012 to Rmb2.04 billion as of the end of last year, representing a compound annual growth rate of 37%.

China Railway Signal is set to become the third largest Hong Kong IPO this year. Huatai Securities, which completed an IPO in May, currently leads the pack after raising $5 billion. GF Securities ranks second having raised $4.1 billion raised in March.

Investors are probably relieved that it will offer some diversification from the heavy pipeline of Chinese brokerages, which have dominated equity capital market fundraising during the first half of the year.

Citigroup, Morgan Stanley and UBS are joint global coordinators of the China Railway Signal IPO. BOC International, China Merchant Securities, Goldman Sachs and Macquarie are joint bookrunners.

¬ Haymarket Media Limited. All rights reserved.
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