China XD Electric aims to raise $1.5 billion from Shanghai IPO

The electrical infrastructure equipment maker offers its shares at a cheaper-than-average valuation as the large deal size will be a true test of investor appetite for new listings.

China XD Electric Co, the country's largest high-voltage electrical infrastructure equipment maker, plans to raise as much as Rmb10.27 billion ($1.5 billion) from a Shanghai initial public offering (IPO) to expand production.

XD Electric is selling 1.37 billion A-shares at a price between Rmb7.10 and Rmb7.90 apiece, which is equal to 30.7 to 34.2 times its 2008 net profit, the company said in a filing to the Shanghai Stock Exchange yesterday.

The valuation is relatively cheap compared with an average historical price-to-earnings ratio of 45 times set by many Shanghai listing hopefuls. XD Electric's domestic competitors, Shanghai Electric and Dongfang Electric, have seen their Shanghai-listed shares trade at an average P/E ratio of 51.2 and 54.13 respectively over the past three months.

Observers see the low price as a cautious move by the company as the offering will be the largest A-share listing so far this year and as such will be a test of investor enthusiasm.

The Xi'an-based company started taking subscriptions from institutional investors yesterday, and will begin to accept retail orders today. About 40% of the deal will be sold to institutional investors through an offline subscription, while the remaining 60% will be offered to all investors. It hasn't said when the shares will start trading.

The deal is being launched less than a week after the Beijing government tightened the reserve requirements for banks in order to restrain lending. Meanwhile, Chinese regulators have been gradually increasing the supply of equities since late last year (by approving more new listings) in an effort to curb soaring asset prices.

China Erzhong Group (Dayang) Heavy Industries, has been approved by the regulators to sell up to 300 million A-shares, or 17.75% of its enlarged share capital in a Shanghai IPO. The Sichuan-based heavy machinery maker hasn't said how much it aims to raise but has noted that it intends to use Rmb2.09 billion of the net proceeds for a variety of projects, including nuclear power, hydropower and technology projects.

Meanwhile, State Grid Corp of China, the country's biggest electricity distributor and one of XD Electric's customers, is said to be selling Rmb30 billion worth of bonds in the domestic market in the coming weeks. The regulator is also reported to have given the nod to other firms, including China First Heavy Industries and Huatai Securities, to raise funds.

Anhui Xinhua Media, a state-owned publishing company, made its trading debut in Shanghai yesterday after raising Rmb1.29 billion by selling 110 million shares at Rmb11.80 apiece. The stock jumped 49.4% to end its first day at Rmb17.63. The Shanghai Composite Index has fallen 1.2% so far this year.

The first IPO in Shanghai this year was brought by China National Chemical Engineering. The company raised Rmb6.7 billion by floating 1.23 billion A-shares at Rmb5.43 apiece. Shares in the company increased 5.89% in its debut on January 7, but have been under pressure since then. Yesterday the stock closed at Rmb5.46, which is a mere 0.55% higher than its IPO price.

XD Electric earned a net income of Rmb1 billion in 2008, 66.5% more than a year earlier. China XD Group, a state-owned company overseen by the State-Owned Asset Supervision and Administration Commission (Sasac), will own a 58.1% stake in XD Electric after the IPO, according to the prospectus.

XD Electric's profitability relies heavily on a small number of customers, mainly power plants and distributors, as well as a small group of material suppliers. These all have very strong bargaining power when buying from or selling their products to XD Electric, the company said in the IPO prospectus.

As China's electricity prices are strictly controlled by the government in an effort to curb rising inflation -- said to be the top agenda of Chinese regulators this year -- Chinese power distributors often refuse to shoulder any extra costs generated by its suppliers, including power equipment makers and fuel producers.

The soaring prices of raw materials also pose a threat to XD Electric. In 2008, raw material costs accounted for 70% of the total production cost of power switches, and 80% of the production cost of transformers, according to the company.

However, higher raw material prices will not immediately impact the profit margin because it takes over a year for equipment makers to deliver products to buyers. Most power equipment companies are also government-supported, which makes it very easy for them to borrow money from state-owned banks to increase their liquidity, said Pierre Lau, an analyst at Citi.

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