China Tianrui Cement raises $124 million from Hong Kong IPO

China Tianrui Group Cement, a leading clinker and cement producer in China’s Henan and Liaoning provinces, yesterday priced its Hong Kong initial public offering at the bottom of the range at HK$2.41 a share for a total deal size of HK$966.2 million ($124 million). If the 15% greenshoe is exercised in full, the offering could increase to as much as $143 million.

The deal was about 1.5 times covered and most of the allocation went to about 25 to 30 institutional and corporate investors, a source said. The buyers were all long-only type accounts from China and Hong Kong, including some alternative asset funds, QDII (qualified domestic institutional investor) funds and corporate investors, the source said. He added that the company wanted long-term investors given the poor after-market performance of other recent IPOs.

The retail tranche was less than 2% subscribed, meaning shares that were initially intended for retail investors had to be allocated to institutional investors instead. However, according to the source, the IPO had the required 100 investors in the institutional tranche and 300 investors overall.

The company had originally set aside 10% of the deal for retail investors and was to offer the remaining 90% to institutional investors

A host of companies have flocked to the market in recent weeks to capture the last window to list in Hong Kong before the end of the year. For the third year in a row, the city’s stock exchange was the world’s biggest destination for new listings in 2011, data from Dealogic showed yesterday.

Hong Kong has attracted $35 billion from 65 new listings this year, followed by New York with $31 billion from 72 listings and London with $18 billion from 17 listings.

But, reflecting a tough year for global financial markets that has been dogged by the eurozone’s escalating debt crisis, the number and scale of new IPOs in Hong Kong failed to match 2010, when $68 billion was raised through 87 new listings, according to the Dealogic data.

The persistent volatility in the secondary market and the lacklustre post-listing performance of companies in general have weighed on investor enthusiasm about IPOs.

High-profile IPOs by Chow Tai Fook Jewellery and New China Life Insurance were no exceptions, falling nearly 10% on their first day of trading in Hong Kong. However, China Life’s A-shares had a much stronger debut in Shanghai. The A-shares added nearly 14% on their first day of trading on Friday, while the Shanghai Stock Exchange Composite Index gained 2% as global markets regained ground on encouraging economic data from the US.

Along with Europe, stocks in some Asian markets, particularly China and Japan, have been among the worst performers this year. Hong Kong’s benchmark Hang Seng Index and the Shanghai Stock Exchange Composite Index have each lost about 20% so far this year, while Japan’s Nikkei 225 is down about 18%. London’s FTSE 100 Index, by comparison, is down close to 10% and US stocks have shown signs of resilience with a 2.5% rise in the Dow Jones Industrial Average.

Observers in the market have pointed out that Europe will likely pose a bigger challenge for the global economy in 2012 than the US, and Asia will not be immune to the potential fallout.

China Tianrui didn’t sign up any cornerstone investors even though that has proven to be an important factor for achieving a successful IPO in recent months. But it did have the support of three pre-IPO investors who will own a combined 52.5% of the company after listing and are subject to a six-month lock-up. They are: Titan Investments, which is majority owned by KKR Asian Fund; J.P. Morgan PCA, a wholly-owned subsidiary of J.P. Morgan Private Capital Asia Fund I; and Wan Qi, owned by Tang Ming Chien, China Tianrui’s non-executive director.

The company sold 16.7% of its share capital in the form of 400.9 million new shares. The shares were offered at a price between HK$2.41 and HK$3.61 each. The final price of HK$2.41 translates into a 2012 price-to-earnings ratio of 2.4 times, based on the joint bookrunners’ estimate. That puts it at a discount to its main comparables, including China Shanshui Cement Group, which trade at about 4.2 times.

China Tianrui’s strength lies in its position as the biggest producer of clinker in Henan and Liaoning, the largest cement producer in Henan and the second-biggest cement producer in Liaoning, it said in a listing document published on the Hong Kong stock exchange website.

As of the end of June, China Tianrui’s annual production capacity of clinker and cement amounted to 22.2 million and 35.2 million tonnes, respectively. That makes it the 10th largest cement producer in terms of production volume and the 11th largest clinker producer in terms of production capacity in China, according to the company’s website.

The cement producer is currently constructing new production plants in Yuzhou and Tianjin. It noted in the listing document that it sees development opportunities there, as a significant amount of existing production capacity in Yuzhou is not up to China’s industry standards, while fast-growing Tianjin is making significant investments in developing its infrastructure.

In addition to building new production lines, the company will also consider buying other cement and clinker producers or production facilities to boost its market position. It will focus on large-scale clinker and cement production lines that have been put into operation recently and that have sufficient limestone reserves and all the necessary permits, certificates and licences.

China Tianrui plans to use about 95% of the proceeds from the global offering for debt repayments and the remaining 5% for general working capital.

The trading debut is scheduled for December 23. The deal was arranged by BOC International, Bocom International, CCB International and Deutsche Bank.