China Rongsheng seeks $2.27 billion from HK IPO

If successful, Rongsheng’s transaction will be one of the largest IPOs in Hong Kong this year.

The recent IPO frenzy and good secondary market performance for new share issues has prompted some issuers to revive earlier listing plans. China Rongsheng Heavy Industries, one of the largest shipbuilders in China, kicked off the bookbuilding yesterday for an initial public offering of between HK$12.77 billion and HK$17.67 billion ($1.65 billion to $2.27 billion) in Hong Kong.

The Jiangsu-based group failed to raise $2 billion from a planned IPO in Hong Kong in 2008 due to the volatile market conditions that year.

The recent hot IPO market has encouraged companies of all sizes and from sectors ranging from retail consumption to heavy industry, to replenish their coffers by selling new shares. In the past two weeks alone, there have been 42 IPOs raising a total of $30.3 billion on stock exchanges in Asia-Pacific (ex-Japan), according to Dealogic.

If successful, Rongsheng’s offering will be one of the largest IPOs in Hong Kong this year following Agricultural Bank of China’s $22.1 billion share sale and AIA’s $20.5 billion listing.  

The company builds ships and marine engines and is engaged in offshore engineering businesses with a focus on oil and gas-related customers and markets. It plans to use the proceeds to build a fourth drydock, and to outfit quays and material wharves to take advantage of a rebound in world trade following last year’s global downturn.  

China’s new economic blueprint is not favouring heavy industry plays. In its 12th five-year plan, the government hopes to address issues like pollution and economic inequalities, which are both caused by years of aggressive investment in the country’s heavy industry – a sector which is capital-intensive but creates few jobs and has made wage increases in China lag behind GDP growth.

However, as Chinese policymakers still need “relatively rapid growth” to retain social peace, the country’s previous growth model is unlikely to change overnight. So, heavy industry plays still have some rosy days ahead.

Rongsheng’s bigger state-owned rival, Guangzhou Shipyard International, is the largest shipyard listed in Hong Kong and has seen its share price surge more than 30% so far this year. It trades at about 11 times 2011 estimated earnings, according to data from Bloomberg.

Four cornerstone investors have shown their confidence in Rongsheng with a commitment to buy an aggregate $155 million of shares in the IPO. Shining East, a wholly-owned subsidiary of China National Offshore Oil Corporation, has agreed to subscribe to $40 million worth of shares; China Life Insurance, the nation’s biggest life insurer, will invest $50 million; China Southern Fund, a Chinese open-ended fund, will buy $35 million worth; and Atlantis, an independent investment boutique, has agreed to purchase $30 million of stock.

Rongsheng is offering 1.75 billion shares, 80% primary and 20% secondary, at a price between HK$7.30 and HK$10.10.

The base offering accounts for 25% of the company’s enlarged share capital. But the deal also comes with a 15% greenshoe option which, if fully exercised, will allow the company to raise up to HK$2.61 billion by issuing an additional 262.5 million shares.

Five percent of the shares are earmarked for Hong Kong retail investors, while the remaining 95% will be sold to institutional investors. The split is subject to a clawback mechanism which could increase the the retail tranche to a maximum 20%.

The shares are expected to be priced on November 12, and the trading debut is scheduled for November 19. BOC International, CCB International, Deutsche Bank, J.P. Morgan and Morgan Stanley are joint bookrunners for the transaction.

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